Michael Richardson Singapore
As China's energy demand has climbed in recent years to fuel its economic growth, Australia and Indonesia have emerged as important sellers of natural gas to the world's most populous nation. Lying relatively close to China, they enable it to reduce dependence on longer haul energy supplies from politically volatile areas in the Middle East and Africa.
But Indonesia -- the largest exporter of liquified natural gas, or LNG -- has canceled some contract sales to Japan, South Korea and Taiwan for 2005 and 2006 because of declining gas reserves and rising domestic demand. This has raised questions about its reliability as a supplier of LNG, which is super-cooled so that it can be shipped in special tankers to foreign buyers.
Meanwhile, China appears to be losing out to Japan in securing LNG from the Gorgon field, off the northwest coast of Australia. Gorgon is one of the biggest accumulations of natural gas in the Asia-Pacific region. The project operator, Chevron Corp of the United States, said earlier this month that it had agreed to supply Japan's Osaka Gas Co with 1.5 million metric tons of LNG annually over 25 years, starting in 2011 -- the year after commercial production from the giant field is scheduled to start.
The Osaka Gas deal is worth nearly US$7.5 billion. It is the third major sale from Gorgon to Japanese power companies since October and underscores efforts by Japan's second largest gas utility to diversify away from Indonesia, its main source of LNG imports.
The sale was also another setback for China National Offshore Oil Corp, CNOOC, which has been in long running and so far fruitless negotiations to secure LNG supplies from the Chevron- led Gorgon project. Earlier this year, CNOOC lost a $18 billion battle with Chevron to take over U.S. energy company, Unocal. It has big gas reserves in Indonesia and other parts of Asia that CNOOC wanted to control.
The battle between Chevron and CNOOC over Unocal soured their negotiations over the terms for sale of Gorgon gas. But China -- a new market for LNG compared to Japan -- finds itself in a difficult position when negotiating supply contracts, especially now when demand is rising for LNG as a less polluting alternative to high priced oil.
With a large and established customer base among utilities and home users, Japanese companies can afford to pay high prices for gas to be sure of supply over the long term. Chinese buyers, on the other hand, have to compete with cheap domestic coal that is widely used to generate electricity in China. And the Chinese government regulates the domestic gas price, keeping it well below current international prices for LNG.
"China is very large potential market, but not immediately a high gas price market," Fu Chengyu, CNOOC's chairman and chief executive, told the Financial Times in October. "At the beginning, if you have a very high price, nobody will use it."
CNOOC signed two big long-term LNG contracts with suppliers in Australia and Indonesia in 2002. But since then, the spot price of LNG has more than trebled, meaning that new sales under long- term contract are at much higher prices than before.
In Indonesia, CNOOC has a contract to buy 2.6 million tons of LNG a year from the Tangguh project in the country's western-most province, Papua. It is due to start production in late 2008. The plant, with a capacity of 7.6 million tons a year, will help to restore Indonesia's LNG export capability.
Meanwhile, China's initial hopes of becoming a top buyer of LNG from Australia seem to be fading. Last April, before the three Japanese utilities clinched their long-term contracts for Gorgon gas, Chevron and its two partners in the project, Royal Dutch Shall and Exxon Mobil Corp, agreed to export 2.5 million tons of LNG annually over 20 years to the west coast of North America.
This means that Japan and the U.S. between them have tied up 6.7 million tons of LNG a year from Gorgon, leaving spare capacity for future sale of just 3.3 million tons. CNOOC had planned to buy 4 million tons a year before the negotiations foundered over price and other issues.
The writer, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.