Energy deal offers huge potential

Chinese joint venture has high hopes for massive Ethiopian oil and gas project

Yu Baodong has made several business trips between China and Ethiopia since last year to help oversee his company's investment and construction projects in the East African country.

"Last December when I took a flight, it still had some vacant seats, but this May I found all the seats were occupied," says Yu, of flying from Beijing to Addis Ababa. "Most passengers were Chinese. The ties between China and Ethiopia are getting stronger day by day."

Yu, chairman and president of Chinese company POLY-GCL Petroleum Group Holdings Ltd, signed an agreement last November to invest in exploration for oil and natural gas in Ethiopia.

It established an Ethiopian subsidiary and hired local employees.

Under the agreement, POLY-GCL acquired rights to two development blocks in the Ogaden Basin of Ethiopia, an area of 1,226 square kilometers believed to be abundant in natural gas and oil, as well as eight exploration blocks covering an area of some 116,000 square kilometers..

The contractual exploration period for the two development blocks is four years. There would be a two-year, plus two-year extension, on evaluation of the blocks followed by a 25-year development period, allowing for an extension of 10 years.

A pipeline of about 8,000 km will transport natural gas north from landlocked Ethiopia to a specially designed marine terminal in Djibouti, where it will be processed into liquefied natural gas and sold on the international market or in China.

The first phase of this project is valued at $4 billion, including exploration and construction of the pipeline, the factory to produce LNG and a special loading dock.

When construction is at its peak, the number of local employees will be about 3,000 people, including workers from Ethiopia and Djibouti. Projections call for production of LNG by the second half of 2018.

One risk factor, however, is that the Ogaden Basin of Ethiopia has been plagued by instability and armed conflict in the past.

In 2007, nine Chinese oil workers and 65 local employees were killed in an attack by armed men on an oil field in eastern Ethiopia.

The Ogaden National Liberation Front, a separatist rebel group advocating the independence of ethnic Somalis in Ethiopia's eastern Ogaden region, claimed responsibility, according to Xinhua News Agency. The Chinese workers were from the Zhongyuan Petroleum Exploration Bureau under the China Petroleum & Chemical Corporation.

Yu says security issues are no longer as large a concern, as the company's construction site has received protection from the Ethiopian army.

"Ethiopia has a stable political and social environment and openness to foreign investments," says Yu.

"We respect local employees' customs and working habits. Due to the hot weather, they leave work at 2 pm, but we quite understand it," he says.

He adds the biggest challenge is the question of how long it will take for his company's investment to bear fruit.

"The most challenging issue of overseas investment is time of return on investment, not only in Africa," he says. "The cost of investment is usually 1.5 times that of the same project in the domestic market."

"There are also some unknown risks such as the laws. It takes time to get familiar with the rules."

To his relief, the company's investments in Ethiopia obtained insurance support from the China Export and Credit Insurance Corporation, including war and currency exchange coverage.

"As our government is promoting use of clean energy, the abundant natural gas in Ethiopia is a great opportunity for our company," Yu says.

"China has had a long-term friendly relationship with Ethiopia, so a good foundation is there for our business development," he says.

Mulatu Teshome, president of Ethiopia, studied in Beijing for about a decade starting in 1976, obtaining his bachelor's, master's and doctoral degrees at Peking University.

Chinese companies have invested in key industries and infrastructure in the country.

"Our investment in the future will create many job opportunities and contribute tax income to Ethiopia, so it will help boost the local economy and welfare of Ethiopians," says Yu.

The natural gas pipeline that POLY-GCL is constructing begins at the oil and gas processing station at the Ethiopian development blocks and ends at the LNG plant in Djibouti.

The short-term capacity of the pipeline is 4 billion cubic meters per year, with a long-term capacity of 14 billion cu m.

The LNG processing plant will have a total capacity of 10 million tons. The first phase of construction will produce 3 million tons of LNG.

POLY-GCL was established in 2012 to develop oil and gas resources in Ethiopia by POLY Technologies Inc, a subsidiary of China POLY Group Corporation, and Golden Concord Group - two long-term collaborative partners.

China POLY Group Corporation, based in Beijing, is a large central state-owned enterprise. It was founded in 1992 and its subsidiaries are involved in military and civilian trade, real estate development, the culture and arts business, mineral resources, and civilian explosive materials and blasting services. By 2012, the total assets of the group had reached 382.9 billion yuan ($62.4 billion).

Golden Concord Holdings Limited, established in 1991 and headquartered in Hong Kong, is an energy group specializing in clean and alternative energy development. It is China's largest non-state-owned power producer and one of the world's largest photovoltaic material manufacturers. In 2013, the power giant from China joined with China-Africa Development Fund to build two 75-megawatt photovoltaic projects in South Africa at a cost of $476 million.

Since 2001, when Ethiopia's government opened its petroleum and natural gas exploration rights to foreign companies, the Ogaden Basin has attracted energy giants from Asia and Europe.

During his visit to Africa, Chinese Premier Li Keqiang said that his ambition is to boost China-Africa trade to $400 billion and increase China's investment in Africa to $100 billion by 2020, which would more than double its exports of manufactured products and equipment to the continent.

In 2007, the China-Africa Development Fund was set up with initial capital of $1 billion provided by the China Development Bank. Early in 2012 it received $2 billion more.

China's investment in Africa had exceeded $25 billion by the end of last year, according to China's Ministry of Commerce.

wangru@chinadaily.com.cn

( China Daily Africa Weekly 10/10/2014 page21)