Meeting China's demanding thirst for energy<\/p>\n
Michael Richardson, Singapore<\/p>\n
As China's energy demand has climbed in recent years to fuel
\nits economic growth, Australia and Indonesia have emerged as
\nimportant sellers of natural gas to the world's most populous
\nnation. Lying relatively close to China, they enable it to reduce
\ndependence on longer haul energy supplies from politically
\nvolatile areas in the Middle East and Africa.<\/p>\n
But Indonesia -- the largest exporter of liquified natural
\ngas, or LNG -- has canceled some contract sales to Japan, South
\nKorea and Taiwan for 2005 and 2006 because of declining gas
\nreserves and rising domestic demand. This has raised questions
\nabout its reliability as a supplier of LNG, which is super-cooled
\nso that it can be shipped in special tankers to foreign buyers.<\/p>\n
Meanwhile, China appears to be losing out to Japan in securing
\nLNG from the Gorgon field, off the northwest coast of Australia.
\nGorgon is one of the biggest accumulations of natural gas in the
\nAsia-Pacific region. The project operator, Chevron Corp of the
\nUnited States, said earlier this month that it had agreed to
\nsupply Japan's Osaka Gas Co with 1.5 million metric tons of LNG
\nannually over 25 years, starting in 2011 -- the year after
\ncommercial production from the giant field is scheduled to start.<\/p>\n
The Osaka Gas deal is worth nearly US$7.5 billion. It is the
\nthird major sale from Gorgon to Japanese power companies since
\nOctober and underscores efforts by Japan's second largest gas
\nutility to diversify away from Indonesia, its main source of LNG
\nimports.<\/p>\n
The sale was also another setback for China National Offshore
\nOil Corp, CNOOC, which has been in long running and so far
\nfruitless negotiations to secure LNG supplies from the Chevron-
\nled Gorgon project. Earlier this year, CNOOC lost a $18 billion
\nbattle with Chevron to take over U.S. energy company, Unocal. It
\nhas big gas reserves in Indonesia and other parts of Asia that
\nCNOOC wanted to control.<\/p>\n
The battle between Chevron and CNOOC over Unocal soured their
\nnegotiations over the terms for sale of Gorgon gas. But China --
\na new market for LNG compared to Japan -- finds itself in a
\ndifficult position when negotiating supply contracts, especially
\nnow when demand is rising for LNG as a less polluting alternative
\nto high priced oil.<\/p>\n
With a large and established customer base among utilities and
\nhome users, Japanese companies can afford to pay high prices for
\ngas to be sure of supply over the long term. Chinese buyers, on
\nthe other hand, have to compete with cheap domestic coal that is
\nwidely used to generate electricity in China. And the Chinese
\ngovernment regulates the domestic gas price, keeping it well
\nbelow current international prices for LNG.<\/p>\n
"China is very large potential market, but not immediately a
\nhigh gas price market," Fu Chengyu, CNOOC's chairman and chief
\nexecutive, told the Financial Times in October. "At the
\nbeginning, if you have a very high price, nobody will use it."<\/p>\n
CNOOC signed two big long-term LNG contracts with suppliers in
\nAustralia and Indonesia in 2002. But since then, the spot price
\nof LNG has more than trebled, meaning that new sales under long-
\nterm contract are at much higher prices than before.<\/p>\n
In Indonesia, CNOOC has a contract to buy 2.6 million tons of
\nLNG a year from the Tangguh project in the country's western-most
\nprovince, Papua. It is due to start production in late 2008. The
\nplant, with a capacity of 7.6 million tons a year, will help to
\nrestore Indonesia's LNG export capability.<\/p>\n
Meanwhile, China's initial hopes of becoming a top buyer of
\nLNG from Australia seem to be fading. Last April, before the
\nthree Japanese utilities clinched their long-term contracts for
\nGorgon gas, Chevron and its two partners in the project, Royal
\nDutch Shall and Exxon Mobil Corp, agreed to export 2.5 million
\ntons of LNG annually over 20 years to the west coast of North
\nAmerica.<\/p>\n
This means that Japan and the U.S. between them have tied up
\n6.7 million tons of LNG a year from Gorgon, leaving spare
\ncapacity for future sale of just 3.3 million tons. CNOOC had
\nplanned to buy 4 million tons a year before the negotiations
\nfoundered over price and other issues.<\/p>\n
The writer, a former Asia editor of the International Herald
\nTribune, is a visiting senior research fellow at the Institute of
\nSouth East Asian Studies in Singapore.<\/p>",
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