China Looks to Australia in Quest for Energy
Last month Sinopec, one of China's big-three energy giants, was in talks with Santos to grab a $1 billion stake in its Queensland gas project. Australia is the latest stop for China as it heads into the largest oil and gas spending binge in history.
Sinopec, China National Petroleum Corporation (Petrochina), and China National Offshore Oil Corporation (CNOOC) have reached into some of the very farthest corners of the globe to supply China's surging energy needs and provide security for the future.
They have explored opportunities from Africa to South America, the Middle East, Central Asia, the disputed waters of the South China Sea, Myanmar, and now the vast gasfields off Western Australia, and Queensland's rich veins of coal-seam methane.
"When the global financial crisis struck, China turned to Australia," Royal Bank of Scotland economist Ben Simpfendorfer said.
"With uncertainty everywhere, they realised that a contract struck in Australia was worth the paper it was written on. And what do the Chinese have to offer? Capital and labour."
Apart from Sinopec's eight-year-old investment in 5.3 per cent of the North West Shelf, and the unconsumated 2007 deal by Petrochina to buy liquid natural gas from Woodside's Browse project, China's gas deals in Australia have been struck in the last year.
Technology is another reason that China has become interested in Australia.
For all its piles of cash and seemingly unending supply of cheap labour and engineers, the latest energy-extracting technologies are mostly in the hands of Western companies.
The need to import energy, and find a way to exploit its own more difficult reserves is relatively new to China. Less than 20 years ago the country -- still the world's fifth largest oil producer -- was an exporter of oil. Now it is the second biggest importer.
China is certainly -- through self-interest as much as any altruistic desire to restrict its ballooning carbon footprint -- ahead of the developed world in adopting and promoting clean energy.
Still, though, oil and gas use rises inexorably, headlined by the relentless spread of the motor car across the country. China's global energy grab has accelerated since mid-2005, when domestic energy players Sinopec and Petrochina were allowed to join CNOOC -- which does no refining or marketing -- in striking offshore deals.
The opportunities for China continue to abound. Last year, more than 350 oil and gas discoveries were announced, according to energy industry website offshore-technology.com.
China has already won two big contracts in Iraq as it diversifies its Middle East oil sourcing outside Saudi Arabia and politically fraught Iran. Angola sits between the two in volume exported to China.
"Oil and gas spending was around $US712bn ($828bn) in 2009, a fall of about 18 per cent compared with 2008," offshore-technology reported.
But this year's capital expenditure is expected to rise, driven mainly by large national oil companies, the largest and most aggressive of which are Chinese.
As well as the big three, other state-run Chinese companies such as Sinochem and the $US200bn sovereign wealth fund, China Investment Corporation, are also major players.
China has had a free run at energy reserves in pariah and near-pariah states such as Iran, Myanmar, Sudan and more recently Venezuela. This is where it is important to make a distinction between the state-owned parent companies, which do many of the big deals, and the listed subsidiaries, which apart from CNPC-Petrochina, have the same names.
The parent companies stitch up the deals and then sell down perhaps 50 per cent to subsidiaries to keep their stock prices bubbling along. But deals in places such as Sudan, for example, are not sold down in this way, to protect the listed companies from being attacked or blackbanned by the US and Europe.
Sinopec and Petrochina to soak up losses from artificially low domestic energy prices, which disappear into the Chinese government accounting black hole, also use the parent companies.
Australia remains a big player in the massive global energy sector, but China's deals are large.
It already has a major energy project in Australia through parent company CNOOC's 5.3 per cent interest in the North-West Shelf Project.
That project supplies gas to customers including CNOOC's Dapeng LNG Terminal in Guangdong, one of 10 massive storage facilities being built on China's east coast.
As well, the group owns interests in an exploration block in the same part of the North West Shelf.
In August Petrochina caused much excitement in Australian government circles when it inked a deal, said to be worth $50bn with Exxon to buy gas from the Gorgon LNG project.
Despite it being a deal by a Chinese company to buy gas from a US company, Resources Minister Martin Ferguson, on behalf of a government desperate for a win, flew triumphantly to Beijing to "sign" the "biggest ever" deal.
In March CNOOC, signed up to a deal with similar eye-watering numbers, agreeing to spend as much as $60bn buying 3.6 million metric tons of LNG a year from BG's proposed export terminal at Gladstone over 20 years.
The numbers for both deals are rubbery, as vast new reserves of so-called "unconventional" gas from oil shale and coal-seam methane are already decoupling long locked-up oil and gas prices, sending gas lower. The deals are on volume, and the price will be reset regularly.
As part of the BG deal, CNOOC also will buy 5 per cent of the group's interests in coal-seam gas tenements in Queensland, and become a 10 per cent shareholder in one of the plant's first two LNG trains.
Last month, the Foreign Investment Review Board gave CNOOC approval to push ahead in its joint venture with Alternative Investment Market-listed Altona Energy to exploit a 7.8 billion tonne coal resource and coal liquefaction project. Both involve new technology the Chinese are keen to understand.
China's biggest move so far to buy into technology that will increase its own gas reserves is its $3.44bn 50:50 joint venture with global energy major Royal Dutch Shell's to buy Arrow Energy.
It may be expensive, but the technological payoff for China is enormous.
The country has an estimated 30 trillion cubic metres of untapped coal-seam gas, and 36 trillion cubic metres of shale gas. To put that in perspective, BG has 0.3 trillion cubic metres.
"All they are in it for is the technology. All those who are wondering why they are paying 36 times -- or whatever the number -- what it is worth are missing the point ," one analyst said.
The question is, what is in it for Shell? Like the world's other remaining energy giants, and most large corporations in every sector, Shell is desperate for a slice of China's huge domestic market.
Sinopec is the last Chinese oil major to find its way to Australia, and it has been busy. In March it paid $600 million for 60 per cent AED Oil's Puffin and Talbot fields.
Earlier this month it was in talks with Santos to buy 19.9 per cent of its Gladstone LNG project for $1bn.
RBS's Simpfendorfer said China had realised the straight acquisition of equity assets in an increasingly energy hungry world -- was very difficult, outside of desperate developing nations.