Chinese pipeline to raise funds through domestic debt market

A joint venture to build a giant 4,000 km natural gas pipeline across China is likely to tap the domestic debt market to raise the majority of funds for it, a top financial adviser to the project said. Construction of the pipeline from the northwest region of Xinjiang to the eastern city of Shanghai is expected to cost $ 5.2 bn, 65 % of which would come from debt, said Philip Crotty, head of global corporate finance for Asia with Deutsche Bank, the financial adviser for the project.

"Raising the debt's going to be an interesting exercise but I don't expect it to be a big challenge," Crotty told. The project aims eventually to pipe 12 bn cm of gas a year for sale in the Shanghai region. Since revenue would be in China's renminbi, or yuan, currency, it would make sense to raise debt domestically, Crotty said.
"It is likely the large majority will be in RMB," he said. "The debt market is pretty liquid right now... we could see major Chinese banks playing a major role in putting this debt package together."
PetroChina signed an agreement to set up joint ventures with a group of foreign oil giants -- including Shell, ExxonMobil and Russia's Gazprom -- to build and operate the pipeline and develop Xinjiang gas fields. China's Sinopec also has a 5 % stake in the project.

The pipeline debt raised would be guaranteed on a pro rata basis, meaning PetroChina would guarantee 50 %, the foreign partners 15 % each, and Sinopec 5 %, Crotty said. The project also involves upstream development -- finding and extracting the gas -- with a cost of about $ 3.3 bn that will be financed through equity, probably from the companies' capital expense budgets, Crotty said.
The companies would hammer out specifics of the joint ventures over the next three to six months, Crotty said. "Many of the fundamental stumbling blocks have been discussed at length. I don't think there is anything else out there that will come out and undermine the deal," Crotty said.

PetroChina and foreign partners will sell 60 % ofthe gas it sends to Shanghai to industrial users by 2005 when demand is expected to reach 12 bn cm. While PetroChina has set an indicative price of 1.29 yuan cents per cm of Xinjiang gas, users in Shanghai may have to pay 1.35 yuan for the fuel. Another $ 9 bn is needed to build a distribution network in eastern China to send gas to factories and households.