August 21,2009

China-Australia: Quarrelling While Growing Closer

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China National Petroleum Corporation (CNPC) has signed a 20-year agreement with ExxonMobil by which CNPC will buy liquefied natural gas worth $41.03 billion from the latter. The agreement says that companies affiliated with ExxonMobil will supply about 2.25 million tons of LNG to CNPC for 20 years, and the whole volume will total 45 million tons. Labeled "a milestone in relations with China" by Australia's Energy Minister Alex Ferguson, the project is the largest trade agreement Australia has ever signed. The transaction reflects the strong trade and investment relations between the two countries.

 

The Gorgon LNG project is located in the northwestern coast of Australia, and boasts a quarter of Australia's proven and potential natural gas reserves, with an annual output of 15 million tons. It is Australia's largest gas field and has drawn the attention of many interested parties.

 

Chevron, the field's operator, holds 50% equity in the project, while Royal Dutch Shell and ExxonMobil each hold 25% stakes. In November, 2008, CNPC signed an agreement with Shell over the purchase of two million tons of LNG in the Gorgon project for the next 20 years. The agreement with ExxonMobil is another big move by CNPC, which has become the largest buyer of Gorgon product.


The project is of high importance to eastern China's energy supply. When China National Offshore Oil Corporation (CNOOC) was attempting to acquire US oil company Unocal, it was eyeing the natural gas resources in Australia. Compared to coal and oil, liquefied natural gas is a relatively clean energy source, and its proportion in China's energy production structure is on the rise. In 2000, the consumption of natural gas across the country was 24.5 billion cubic meters. By 2008 it had reached 72 billion cubic meters, with an average annual growth rate of 14.4%. However, natural gas is not abundant in China. Experts say that in 2010 the supply and demand gap of natural gas in China will reach about 30 billion cubic meters, increasing to 40 billion cubic meters in 2015.

 

In recent years, China's oil firms have frequently signed large natural gas purchase agreements in the international market. Earlier, CNPC signed an LNG purchase agreement with Qatar for three million tons per year for 25 years. CNOOC signed an agreement with BG GROUP for 3.6 million tons per year for 20 years.

 

CNPC is arranging four domestic LNG receiving stations. Among them, stations in Nantong in Jiangsu Province and Dalian in Liaoning Province are operating, and the projects in Shenzhen and Hebei Caofeidian are underway.

 

Recently, a number of political and business incidents have complicated Sino-Australian relations. Australia issued a visa to the Uighur nationalist Rebiya Kadeer, causing Vice-Foreign Minister He Yafei to abort a visit to Australia. Rio Tinto's on-and-then-off share cooperation with CHINALCO stirred up a hornets' nest of Chinese anger, and the tough stance of Rio Tinto and BHP Billiton in the iron ore negotiations is seen as a conspiracy by the Chinese. The recent arrest of four Rio employees, one of whom is an Australian citizen, on spying charges does not endear China to the Aussies.


The growing mutual dependence between the two countries, however, will not disappear because of these conflicts. Yanzhou Coal Mining has just acquired Australia's Felix Resources. China Iron & Steel Association has announced it has reached agreement with Australia's third-largest iron ore miner FMG on a 35% reduction of ore prices.  China Minmetals, Baosteel, Wuhan Iron and Steel, and Handan Iron & Steel all have stakes in Australian mines. Even the charges against Rio's Stern Hu and his colleagues have been reduced from stealing state secrets, possibly a capital offence, to abusing commercial confidentiality, which will require only three to seven years of their lives if convicted.

 

The two countries' commercial relations are pushing them closer and closer together. China is increasingly dependent on Australia's resources while Australia is relying ever more on resource exports to China. The Australian dollar is almost correlated with the Shanghai Composite Index, the market benchmark, just as the Australian stock market is with China's macroeconomic situation.

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