Financial Times: China returns to global gas market with Shell deal

By Richard McGregor in Beijing and Peter Smith in Sydney
Published: September 5 2007 03:00 | Last updated: September 5 2007 03:00

China’s soaring energy demand has forced it back into the global natural gas market in search of cleaner burning though potentially more expensive fuels to power industry and provide residential electricity.

Hu Jintao, China’s president, presided over the signing of a 20-year agreement between PetroChina and Royal Dutch Shell in Perth yesterday for liquefied natural gas from the Gorgon project off Western Australia.

China signed its first-ever long-term LNG supply deal five years ago, also with Australia, but had baulked at paying the higher world prices which have prevailed in most markets since then.

But with power production far outpacing this year’s first half GDP growth of 11.5 per cent and rising pressure to reduce greenhouse gas emissions, Chinese officials now see a pressing need to secure long-term gas supplies.

Coal remains China’s staple fuel, driving about 80 per cent of power production, but it is also the main reason why the country will overtake the US this year as the largest global source of greenhouse gas emissions.

China is this week expected to announce further energy deals in Australia, cementing an already strong energy alliance forged in the early 1980s.

The precise value of yesterday’s multi-billion dollar deal was not disclosed, but Jon Chadwick, a Shell executive, said he was “pleased with the price”.

“[The agreement] sets a new benchmark for LNG supplies into China and underlines Shell’s commitment to Chinese LNG customers and to the Gorgon project,” he said.

Frank Harris, the head of LNG consulting for Wood Mackenzie, in Edinburgh, said: “PetroChina must have agreed to negotiate at a ‘sensible’ price level, otherwise Shell wouldn’t have wasted time putting this deal together.

“China has realised Iran in particular, which they had turned to for volumes in the last couple of years, has a lot of challenges with LNG and that if they really do want additional volumes, it is going to have to buy from top-tier suppliers at market rates.”

China had annoyed LNG producers in Australia by persistently pressing for a repeat of the deal struck in the first long-term contract in 2002, even though market prices had soared subsequently. The inflated global market has made LNG uneconomic for sellers inChina as government controls have kept the domestic price low.

China is committed to allowing the price of oil, gas and electricity in general to rise, which might in turn help to force efficiencies in energy use.

But at a press conference in Beijing yesterday, Chen Deming, head of the energy office at the National Development and Reform Commission, said such reforms would have to be gradual.

Mr Chen said that price reform had to take account of the situation of China’s farmers, urban poor and public transport users.

The agreement signed yesterday is conditional upon a final investment decision on the Gorgon project, whose partners include Chevron and ExxonMobil.

The delayed Gorgon project has suffered from what Chevron said was “an overheated global construction market”, adding it continued to do evaluation work to ensure Gorgon was “internationally competitive”.

Copyright The Financial Times Limited 2007

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