Primeline Energy Holdings Inc. - Dynamic Gas Market

Introduction Exploration History Lishui 36-1 Gas Field Development Lishui Gas Play Block 25/34 Petroleum Contract Dynamic Gas Market Gas Agreement and Overall Development
Program Reserve Report

China Energy Market

Historically, natural gas has not been a major fuel in China, but its share in the country's energy mix is now rapidly increasing. In 2009 natural gas represented about 3.9% of the entire energy mix (up from 3% in 2007), compared to the world average of 24%, and the Chinese Government has recently announced plans to raise this percentage to 8% by 2015. Total consumption in 2009 was circa 89 bcm so the proposed target represents a total of circa 250 bcm in 2015. Rapid development of the natural gas industry is now one of China's strategic policies in order to help resolve its acute energy shortage and to achieve its target for pollution reduction. Part of this strategy is to encourage the transportation of gas from west China and other countries around China, including Russia and the Central Asian countries, where there are significant resources, to east China where demand is highest and the energy shortage is most acute.

China's first major West to East Gas Pipeline, built by CNPC, parent company of Petrochina Ltd. (NYSE:PTR, www.petrochina.com.cn), was completed on 1st October 2004 and now carries approximately 12 bcm of gas per annum from the Tarim Basin along a 4,000 km pipeline which terminates at Shanghai. There were initial concerns that there would be insufficient demand for the gas, but now demand exceeds supply with a total of 66 bcm of natural gas having been supplied via this pipeline by the end of 2009.

In order to respond to increasing demand, there are now three new long distance gas pipelines from west China to east China, two of which are to supply gas to Zhejiang Province. One is being developed by CNPC and the other by Sinopec.

In August 2007, CNPC announced proposals for a Second West to East pipeline with a capacity of 30 bcm per annum. The pipeline, which will be over 6,000 km, is planned to run from Turkmenistan through Xinjiang to Guangzhou in southern China, branching at Nanchang to run east to Shanghai and passing through western and northern Zhejiang Province. Construction commenced in February 2008, with gas supply due to start in 2012. CNPC signed agreements in July 2007 to import 30 bcm of natural gas per annum over 30 years from Turkmenistan to supply this pipeline.

On 29th March 2010, Sinopec announced that the construction of a natural gas pipeline running from south west Sichuan Province to Shanghai had been completed. This new pipeline, with a total pipeline capacity of 17 bcm, is expected to supply 12 bcm per annum to cities along the pipeline, including northern Zhejiang Province.

In the past, the Chinese Government has held state-set gas prices based on local costs and thus below international LNG market levels. However, strong demand for gas, coupled with pollution targets, has meant that China has been forced to obtain supplies from foreign sources at market prices. As a result, there has been significant upward pressure on prices and, on 31st May 2010, China National Development and Reform Commission announced increases in prices for onshore natural gas products and LNG prices in China are converging on international LNG prices. China is currently buying LNG on the spot market and CNPC and CNOOC have recently reported signing long term LNG supply contracts at prices well above current North American gas prices. These developments are clearly indicative of a maturing gas market with a more market-driven pricing system which should benefit the development of Block 25/34 in the long term. It is also apparent that a nation-wide gas grid is in the process of being established in China and the east China region, as the most industrialised region, will be the frontrunner for this improved gas infrastructure.

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