Building on the Bay

Until you see it, it's difficult to grasp how large the $4.3 billion petrochemical complex that Shell and China National Offshore Oil Corp. (CNOOC) are building at Daya Bay in southern China really is. "You'd need a helicopter to take a good photo," says Nick Wood, Shell's Beijing-based spokesman.

There are now 16,000 workers at the site, each working at least 60 hours a week to get the project fully operating in early 2006. "The complex is within budget and within schedule," states Simon Lam, CEO of the joint-venture company, CNOOC & Shell Petrochemicals Co. (CSPC).

As the work proceeds, a question looms about the fate of the oil refinery that Shell has wanted to build in China since the 1980s. Shell had proposed an ambitious dual refinery/ethylene cracker. However, after authorities in Beijing denied permission for the refinery, the company eventually decided to build only the cracker, although, through CSPC, it did acquire adjacent land for the refinery.

Shell and CNOOC are presently discussing a venture that would build the refinery. Wood says that CSPC has transferred the refinery land use rights to CNOOC, allowing the latter to build the refinery on its own should it decide to do so. A CNOOC spokesman in Beijing insists that CNOOC has not applied for a license to build a refinery yet. He says that CNOOC is still considering the project and that Shell may well be a partner. Wood says Shell is "pleased to be invited to participate" in the project but will find it acceptable if CNOOC goes alone.

Costing about $2 billion, the refinery would, in addition to making fuel, supply about 80% of the feedstock needed by the chemical complex. "It's well known that integrating a petrochemical complex with a refinery yields cost savings amounting to as much as $150 million per year," says Jean-Louis Bilhou, director of manufacturing at CSPC. Lam adds that after many years of oversupply, the economics of oil refining have improved.

Even if the refinery is built without Shell's participation, Lam and his CSPC team will still have the satisfaction of having done an impressive job at Daya Bay. An energetic sweet-talker from Singapore, Lam was, before moving to China, chairman of all of Shell's operations in Singapore, where the company operates refining and petrochemical assets worth billions of dollars.

In China, Lam's script is immensely more complex. His staff members come from 16 countries. Some have worked only for state-owned Chinese companies; others have never worked in China. One of his challenges is to foster an environment in which employees respect each other.

Complicating matters, Chinese contractors often have trouble comprehending Shell's performance requirements. However, once they do, the work progresses fast, Lam says. All things considered, differences in labor costs mean that it is costing 20% less to build the complex in China than it would on the U.S. Gulf Coast.

The $4.3 billion that CSPC has budgeted to get the complex fully operating in 2006 is more than for comparable projects being built in Nanjing and Shanghai. But in Daya Bay, Lam points out, Shell has to build its own infrastructure, pier, power plant, and effluent treatment station. Covering 1.65 sq miles, the complex will contain an 800,000-metric-ton-per-year multifeed ethylene cracker and a range of downstream facilities.

IN AN ERA when advertising hype and reality often stand far from each other, CSPC has gone to exceptional lengths to prove that it really does care about the environment and the impact the project is having on the community.

More than 8,000 people were living on the land designated for the CSPC project. They were relocated into new housing that was paid for by CSPC and is far nicer than the squalor they left behind, the company says. To monitor the villagers' progress in adapting to their new environment, CSPC arranges for external monitoring twice a year and makes the reports public.

Lam says coral discovered during dredging of the bay was moved to another location. He adds that treated liquid effluents from the petrochemical plants will be carried by pipeline into strong oceanic currents 15 miles from the coast.

One American construction manager says CNOOC has not been particularly impressed with CSPC's social conscience. He says CNOOC managers reckon that the complex--and the refinery--would cost less to build if less emphasis were placed on safety, environmental, and social concerns.