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Doubts Cloud Gas Deal

Sara Yin – Updated on Sep 28, 2008 – SCMP

The pink dolphins are safe, at least. The memorandum of understanding between Beijing and Hong Kong for gas supplies tied local energy needs and planning to those of the mainland. And although that meant the end of plans for a US$10 billion gas terminal on South Soko Island – which pleased environmentalists – it remains to be seen whether the deal is good for Hong Kong’s long-term interests.

Last month, Chief Executive Donald Tsang Yam-kuen announced an agreement that he had signed with the National Energy Administration, Beijing’s new energy body. It put a significant amount of Hong Kong’s gas needs into the hands of the mainland’s state-owned oil companies.

Under the memorandum, the central government ensures a supply from several sources: offshore natural-gas reserves, piped gas, and possibly an LNG (liquefied natural gas) terminal built on the mainland.

“Hong Kong will see a net increase of at least 1 billion cubic metres of natural-gas supply for clean power generation,” an Environment Bureau spokeswoman said. “This certainly provides for a higher stability and reliability of gas supply in the long run.”

The agreement halted the HK$10 billion plan – more than two years in the making – for local company CLP Power to build the terminal to supply LNG, a costlier but greener fuel, off Lantau Island.

Mr Tsang described the new deal as “extremely good news” for consumers and the environment. Instead of paying for an expensive LNG terminal on South Soko Island, he said, taxpayers would only have to pay for gas pipelines to the mainland.

Local green groups such as Friends of the Earth and WWF applauded the decision to abandon construction in an area populated by pink dolphins and finless tortoises. But many are concerned over what the government’s intervention means for the public.

“This memo is what I would call a potential game-changer,” said Civic Exchange chief executive Christine Loh Kung-wai. “It represents a major departure of Chinese energy policy for Hong Kong.”

Historically, Hong Kong’s two private power companies, CLP Power and Hongkong Electric, have negotiated the securing of raw materials on their own. Thanks to a scheme of control set in the early 1990s, the two utilities have been among the most profitable in the world. The government has tried to undermine this in the past by flirting with new market players. It had been considering a proposal from China Power, a mainland energy giant run by Li Xiaolin, the daughter of China’s former premier, Li Peng.

As well, a new scheme of control that reduces CLP Power’s profit margins begins next month.

“The government always seemed very supportive and positive about the terminal,” said a CLP Power employee. “We were all surprised” by the memorandum. Officially, CLP Power denies being blindsided and remains supportive.

Said Ms Loh: “The government did not let on that it was actively negotiating with the mainland … if [the government] has a new energy policy, it should make an announcement.”

While the memorandum of understanding might have come as a surprise to the public, CLP Power’s new terminal was not a done deal.

The Environment Bureau spokeswoman pointed to a Legislative Council paper dated June 30, available on Legco’s website, saying that due diligence on CLP Power’s plan was still continuing.

As early as 2003, CLP Power, which supplies 25 per cent of the city’s electricity, reported that its gas supply – Hainan Island’s Yacheng fields – would dry up by 2013. This prompted the company to propose building Hong Kong’s first LNG terminal to receive a sufficient amount from suppliers around the world. The facility would import more than 4 billion cubic metres of natural gas a year at a predetermined cost, and take at least four years to build.

After an exhaustive third-party study to assess the environmental impact of CLP Power’s proposed sites, the Environmental Protection Department chose South Soko Island and granted its approval early last year. Environmental Secretary Edward Yau Tang-wah asked CLP Power to launch a public website detailing its planning efforts, and to find a way to reverse its environmental impact around the site; CLP complied.

The only approval needed then was the Executive Council’s, and even as late as July, Mr Yau seemed to think it was a foregone conclusion. With Hong Kong’s gas supply expected to run out in less than five years, he said the statutory planning process for the Soko Island terminal would start soon “although no final decision had been made”. CLP Power even had a contract with its first supplier, the British gas company BG Group.

In a statement in late June, CLP Power said: “The terminal is expected to start up no later than 2013, subject to final approval by the Hong Kong SAR government.”

Although some observers are applauding the opportunity for the city to be drawn into the mainland’s energy framework, others argue that the National Energy Administration’s policies may clash with Hong Kong’s interests. The mainland energy industry is heavily regulated, and a new, long-awaited law to commercialise the industry is yet to be enacted.

This month, a government source told the oil-industry magazine Platts: “The public consultation of the draft new energy law finished early this year, in late February, but the draft law is still held in the National Energy Administration, which was recently [created] to strengthen the government’s management of the energy sector.”

Industry observers are also wondering how the government’s deal will save consumers more money than CLP Power’s project.

“We don’t know anything about the price of the gas. At least with CLP, they would have entered a long-term contract with a known price … now it’s not clear what price the government has agreed to,” said Bill Barron, an environmental economist at the Hong Kong University of Science and Technology.

“The situation reminds me of the Disneyland thing, where we didn’t know how bad the deal was until years later.”

Baptist University’s director of energy studies, Larry Chow Chuen-ho, said the Soko Island terminal would have insulated Hong Kong from supply disruptions from the mainland.

Like Professor Barron, Professor Chow is concerned about the lack of discussion about price. At least with the Soko Island terminal, he said, “we can have complete control on how much to buy and how much to pay”.

Furthermore, the amount of gas supplied can only be estimated at this point. The memorandum does not define a specific volume of gas imported each year, only a non-legally binding assurance to keep Hong Kong’s level of gas supply “over and above the current level”.

Professor Chow said he trusted Beijing to provide a sufficient supply of gas, but Professor Barron was more sceptical. “Even if everything goes well – like the new wells at Yacheng actually produce gas – the supply won’t add up to the reliable supplies the Soko Island LNG terminal would have provided. We’ll be burning more coal and creating even higher levels of pollution.”

And although the memorandum renews existing contracts with the China National Offshore Oil Corporation and China Guangdong Nuclear Power Holding for another 20 years, these two companies will have to tap new wells in Yacheng. And no one seems to know when these wells will run out (if any gas is found in the first place), according to Professor Barron.

In fact, based on the memorandum, both governments will devote resources to study the feasibility of building an LNG terminal in Guangdong.

But according to the Hong Kong government, fixing price and supply was not the point of the memorandum. It was only meant to provide “new opportunities for collaboration between energy enterprises on both sides, and is by no means a supply contract binding any companies”, said an Environmental Protection Department spokeswoman. “Detailed arrangements for supplying natural gas and electricity to Hong Kong, such as pricing and quantity, will be worked out on commercial principles … on both sides.”

Professor Barron found this point “disingenuous”. With only one country to supply Hong Kong’s gas, he wondered, “How can a power company negotiate price from a strong position? The government has seriously restricted the options faced by the buyer.”

After seeing its gas-terminal plan axed, CLP Power – publicly at least – supports the government’s deal with the mainland.

“CLP, under the guidance of the Hong Kong government, is now working directly with the National Development and Reform Commission and other mainland parties on the implementation of the memorandum,” a company spokeswoman said.

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