Business Performance

At the end of 2004, Shell Companies in China had invested some US$3 billion in the country. More than US $800 million was committed during the year as funding for the Shell share of projects, a record for a single year. The year was profitable with proceeds of US$664 million from Shell's share of oil produced in the Xijiang fields in the South China Sea, and from our oil products sales.

Chemicals

Shell's largest project in China is the US$4.3 billion Nanhai petrochemicals plant, now being built in Daya Bay, Guangdong Province. Shell has a 50 per cent share in the joint venture company, in partnership with the CNOOC Petrochemicals Investment Ltd.

The project was 85 per cent complete at the end of the year with engineering and procurement almost complete. It remained on target for start-up by the end of 2005.

Shell invested almost US$ 600 million in equity during the year and the project had borrowed a total of more than US$1.5 billion by the year-end from its onshore and offshore lenders.

The CNOOC and Shell Petrochemicals (Marketing) Company Ltd continued to develop markets for its products so it can start sales immediately following start up. It imported products from Shell plants in a pre-marketing programme that covered Guangdong and East China.

Oil Products

The Oil Products business continued its past trend of strong sales growth, reflecting growing demand in China for quality petroleum products and services.

Lubricants: Shell's sales of lubricants showed double-digit growth during the year. China is now Shell's fifth largest lubricants market globally, and its largest in the Asia-Pacific region.

During the year, we focused on improving our management of distributors, branding, consumer promotions and working with major automotive manufacturers in China including Volkswagen and Skoda.

We re-positioned our Helix motor oil brand in a 15-city campaign. Shell's contribution to the Ferrari team during the first Formula One race held in China, at Shanghai in September as also showcased.

Shell's Advance motorcycle oil was used by the Zongsheng team, which took third place in the World Endurance Championship race in Zhuhai in May.

We also worked hard to expand our business with agricultural, construction and direct fleet customers and we improved our relationship, service management and portfolio management with industrial lubricants customers, increasing sales volumes.

At the end of the year we were finalizing a joint venture contract with the Shanghai Automotive Industry Sales Corporation to develop fast lube service facilities in China, modeled after the Jiffy Lube concept in the United States. The plan is to provide drive-in, high-quality preventive maintenance services with quality products for motorists. Jiffy Lube has 2,200 service centers in North America, serving approximately 30 million customers each year.

Retail: We signed a joint venture with Sinopec to establish 500 retail sites in the Jiangsu Province. By the end of the year, the joint venture had started operating 213 sites in Suzhou (see box).

Sales at our other 40 sites in China showed double-digit growth, mainly from increases in fuel sales volumes at each site and the addition of nine sites during the year.

Bitumen: Sales volumes of Emulsion and Waterproofing both doubled in 2004. During the year, the bitumen business introduced two new products into the China market, Cariphalte JS and emulsified Mex-C. Cariphalte is a road maintenance sealant while emulsified Mex-C is coloured bitumen with benefits of easy application and energy and cost savings. We started to manufacture Mex-C in China during the year.

In September 2004, Shell China acquired a 75 per cent share of Shanghai Pioneer Road Service Company Limited (SPRS), a Shanghai-based company that sources, manufactures and supplies asphalt mix products and technical services for road pavement to Shanghai customers.

The joint venture provides more than 200,000 tons of asphalt mix products each year to about 100 customers in the Shanghai market adding another dimension to Shell's current bitumen activities in China, which involve the supply of a portfolio of quality bitumen products from its five depots.

Gas and Power

Natural gas

We signed a joint venture framework agreement with the Hangzhou Gas (Group) Company Limited in early 2004 to construct and operate a high-pressure natural gas pipeline system to provide natural gas to a range of customers in Hangzhou. The Hong Kong and China Gas Company is another party to the agreement. We expect to sign a Joint Venture Contract in early 2005. This is a good opportunity for Shell, as one of the world's leading natural gas producers and marketers, to get involved in bringing clean fuel to an important market, and in line with its objective of playing a leading role in developing natural gas as a clean energy to fuel China's economic growth.

Coal gasification

The construction of a 2,000-tonne/day coal gasification plant in Yueyang, Hunan Province, a 50:50 joint venture with Sinopec, continued on schedule with mechanical completion expected by the end of 2005.  The plant, which uses Shell's coal gasification technology, will provide synthetic gas as feedstock for a nearby Sinopec fertilizer plant.

We also concluded five new Shell coal gasification licensing deals with Chinese companies this year, bringing to 12 the number of licence deals in China. Four of the new licences are from Hunan and Liaoning provinces where the licensees will manufacture the synthetic gas for feedstock for methanol production.  Another licence, signed with the Shenhua Group Corporation, will be for a plant to produce hydrogen required for Shenhua's new direct coal liquefaction process. All of these projects will require plants of a capacity between 1,000 and to 2,000 tonnes/day of coal.

Shell's coal gasification technology is one of the cleanest ways of using coal and has potential for widespread use in the country, not only in the chemical industry where it is a competitive alternative to naphtha and heavy oil, but also in power generation and synthesis fuel sectors which are strategically important to China given the country's limited indigenous reserves of oil and gas. At the same time, the gasification technology provides the most efficient and cost-effective way to capture carbon dioxide (CO2) in coal utilization and could potentially offer a near zero emissions solution.

Gas to Liquids

Shell also introduced its new GTL (Gas to Liquids) Fuel to China with a test on buses in Shanghai in partnership with the Pudong Bus Transportation Company.

The Shanghai trial involved eight buses, fitted with local engines (equivalent to Euro 1), running on a mixture of 70% local quality diesel and 30% GTL Fuel for a period of two months. Results of the trial are expected in early 2005.

Coal to Liquids

Shell has coal-to-liquids (CTL) technology based on the combination of its coal gasification and GTL technologies. In November, we signed a memorandum of understanding with the Shenhua Group Corporation Ltd and Ningxia Coal Industry Co. Ltd. (Ningmei) to look at the possible application of our CTL technologies in China during a nine-month Pre-Feasibility Study that will analyse the market, evaluate the economics, review technical solutions and regulations, and identify possible sites for projects.

Exploration and Production

Oil production from the Xijiang oil fields in the South China Sea, where Shell is a partner with CNOOC and ConocoPhillips, reached 72,000 barrels per day in 2004, six per cent above target volumes. With oil prices remaining high during most of the year, our share in the field brought proceeds of US$ 265 million.  The Floating Production Storage and Offloading vessel was dry-docked for maintenance during the year and replaced by a temporary vessel.
We drilled two exploration wells in the 11/26 Contract Area, Bohai Bay offshore, Shell's first wells in this area. The wells did not find commercial quantities of hydrocarbons though operationally results were good. The wells were drilled faster than planned with no accidents, injuries or environmental incidents.

The Joint Venture Framework Agreement was terminated for the West-East Pipeline Project in which Shell was negotiating participation in a consortium of international companies. We were disappointed not being able to reach agreement on the project but we are proud of the contribution we made to the project, which we believe is beneficial to China in the long term.

Shell continued to discuss with PetroChina participation in the development of the Changbei gas field in Shaanxi and Inner Mongolia. A joint Shell and PetroChina working team updated the Overall Development Plan (ODP), which passed PetroChina's Expert Review in November. A final Investment Decision is planned to be taken in 2005.

During 2004 we evaluated the 22,000 square kilometre East China Sea licences in which Shell took a 20 per cent share in 2003. The licences are operated by CNOOC, and Shell assigned five secondees to the operation in Shanghai. One appraisal well and one exploration well were drilled, and large-scale studies were completed on reserves, development options and basin potential. Following these operations and studies, it was decided not to proceed to a Final Investment Decision and Shell withdrew from the venture in September.

In December, Shell Exploration Company BV and the Bureau of Geological Exploration and Mineral Development (BGMR), Jilin Province, signed a Co-operation Agreement to study oil shale resources in the province.

The agreement commits Shell and BGMR to work together to set up a joint venture company to carry out studies of Jilin's oil shale reserves, which are among the largest in the country.

This agreement follows a Protocol for Cooperation in May signed by Shell and the Jilin Government to jointly conduct a desktop study of Jilin's oil shale reserves.

Shell has developed a shale oil recovery process that is currently being tested in the United States.

Shell Global Solutions International

Shell Global Solutions provides innovative services and technologies that deliver savings to companies and organisations through improvements in technologies, services and management skills.

In 2004, Shell Global Solutions supplied technologies for a refinery expansion by PetroChina in Dalian to help produce clean fuels. It also provided oil gasification technology to Sinopec's Fujian Refinery for its expansion programme. This technology converts heavy oil to clean gas to power the refinery.

Renewable energy

China is today Shell's largest solar market in the Asia Pacific region with an installed capacity of more than 7 MWp of solar power in over 50 different projects in China over the last 10 years. Our business will continue to grow in the short and long term, particularly the rural electrification markets.

Shell photovoltaic panels are being used in a US$ 25 million joint Chinese-Dutch development project to provide electricity to some 78,000 homes in rural areas in Xinjiang currently without electricity. More than 14,300 solar systems were supplied in 2004 bringing the total number sold so far to 30,189.

The project is sponsored by the Dutch Government under the China Brightness Programme, organised by the State Development and Reform Commission, allowing households to get loans to buy the systems.  The project started selling solar systems in 2002.

Shell Solar installed centralized photovoltaic systems to 26 remote villages in the Yunnan and Xinjiang during the year, under a contract valued at about Euro 2.7 million. The total installed power was 200kWp for the villages, nine of which are in Xinjiang and the rest in Yunnan. These villages have a total of about 1,300 households, which currently have no access to electricity.

Hydrogen

Shell drafted a Terms of Reference for a study with the Shanghai Fuel Cell Powertrain Company, Shanghai Sunwise Energy System Company and Tongji University on introducing hydrogen-powered vehicles in the Shanghai region.

Editor: Donald