In China, the only way is down

Like other oil firms frustrated in their exploration efforts, BP is finding more joy downstream. Teresa Poole reports

In 1973, with the Cultural Revolution still raging, two unconnected events took place in the Chinese petrochemical industry: BP signed its first chemical licence agreement with China; and Chairman Mao decided to build the Sinopec Sichuan Vinylon factory in the remote western hinterland of Changshou, safe from the perceived Soviet threat.

More than two decades on, these two strands of history were finally entwined. Earlier this year, a team of BP executives arrived at the head of a very lengthy convoy of Chinese officials for the ground-breaking ceremony to mark a new $240m (pounds 150m) joint venture acetic acid plant in Changshou.

The partnership between BP Chemicals and Sinopec Sichuan Vinylon was BP's first big downstream direct investment on the mainland, and put the seal on its recent strategic shift in China away from exploration. The deal also established BP as a serious partner for Sinopec (China Petro- chemical Corporation), the state-owned oil giant. Last week, a second stage in this new strategy was inked in when BP Chemicals signed a letter of intent with another Sinopec subsidiary, Shanghai Petrochemical, this time for a $2.5bn joint-venture ethylene production and derivatives complex. Output will be 650,000 tonnes a year.

BP is not alone among foreign oil companies in re-orienting its interest in China. When economic reform first welcomed the big international companies at the end of the 1970s, most came with visions of the exploration bonanza that might await them. It proved elusive. BP Exploration, for instance, opened a Peking office in 1979 and has spent more than $200m on offshore and onshore exploration, with no commercial discoveries.

There has been general disenchantment among the foreign oil companies, and not a few complaints that China has been keeping all the promising acreage for itself. Xinjiang province, in the far North-west, once billed the "new Middle East", failed to provide the expected results. So the multinationals started to look at the downstream sector as a more attractive option. In 1994 BP said it was withdrawing from offshore exploration, and it has since sent most of its upstream staff home, leaving a much reduced team "to pursue gas market opportunities".

BP Chemicals is now the group's standard-bearer in China. Until the Sinopec Sichuan Vinylon deal, it concentrated on licensing agreements for its processing technology. Now it is offering what China demands of its foreign investors: significant financial commitment and technology transfer.

When the BP executives turned up in Changshou in January, most of the 30,000 local population lined the streets to welcome them amid a deafening display of firecrackers. Changshou is on the Yangtze river 40 miles from Chongqing, the biggest city in Sichuan province, though the journey can take four hours by car on the dilapidated rural roads.

Chairman Mao approved Changshou as the site for a chemicals factory as part of his "Third Line" defensive policy of shifting heavy industry to remote, hilly inland regions out of range of the presumed Soviet aggressors. These days the factory is the local economy and is still a very Chinese- style work unit, providing schools, medical care and housing for its workers.

The acetic acid plant, 51 per cent owned by BP, will be ringfenced from these welfare commitments. A new road will cut the travelling time to Chongqing to nearer an hour, and a brand new American-style house will be built to ease the experience for the on-site British manager and his wife. The plant is due to start running by the end of 1998, producing 150,000 tonnes of acetic acid a year - the biggest such facility in China.

Whereas Chairman Mao liked Changshou for its remoteness, BP saw it as a base for selling into the heartland of China.

Sichuan province alone is home to 100 million people. About 40 per cent of the acetic acid will be sold to Sichuan Vinylon for derivatives manufacture, and the rest to other industries; acetic acid is widely used in such areas as food manufacturing, textiles, paints and electronics. China's demand for acetic acid is forecast to rise from the present 400,000 tonnes to 700,000 by the year 2000.

Having established its foothold in downstream investment, last week's letter of intent for Shanghai represents a more ambitious step for BP Chemicals, although it is still at the pre-feasibility study stage. Even without any negotiating pitfalls, production is not scheduled until early next century. A plant making acrylonitrile, used in fibres and man-made rubber, may start construction earlier to meet Chinese demand for the product, which is forecast to double over the next five years.

At the ceremony to mark the letter of intent, Sheng Huaren, the president of Sinopec, promised: "We will make every effort to progress this project under the principles of equity, mutual benefit and respect." In reality, China drives just as hard a deal in petrochemicals as it does in every other sector. BP will put in cash and technology, while Shanghai Petrochemical's contribution will include some of its existing plant. China plans six big ethylene projects by 2010, and has been courted by all the world's big players. Earlier this year it signed a letter of intent with BASF for a $6bn plant in Nanjing.

However, the gleam in the eye of BP and all foreign oil companies in China is a chain of brand-name petrol stations. For the time being this is a fantasy, with the Chinese state operating a virtual monopoly apart from occasional local arrangements. As Gary Dirks, president of BP China, said diplomatically earlier this year: "The Chinese are not at present inclined to allow large-scale retail merchandising of the kind we're interested in."