The Wall Street Journal: In China, a Domestic Shift Spurs New Approach on Natural Gas

By SHAI OSTER
September 10, 2007; Page A12

BEIJING — China’s decision to sign two deals to import natural gas from Australia signals its willingness to pay more for cleaner energy as it shifts from the Middle East for supplies.

Last week, China’s biggest oil-and-gas company, PetroChina Co., signed deals to import natural gas from Australian company Woodside Energy Ltd., which owns nearly half the Browse natural-gas field, and from Royal Dutch Shell PLC, a stake owner in Australia’s giant Gorgon gas field, half-owned by Chevron Corp.

Valued at about $37 billion over 15 to 20 years, the deal with Woodside Energy to import liquefied natural gas, or LNG, was hailed in Australia as the country’s biggest single export ever. Woodside Energy is a unit of Woodside Petroleum Ltd.

“It’s an affirmation for demand for cleaner fuels and a confirmation that Chinese companies believe that providing these fuels can be a profitable business in China,” said George Gilboy, chief representative for Woodside in China.

Australia and China have been stepping up economic cooperation, especially in resources. Australia has agreed to supply uranium to China and already sells iron ore, nickel and other ingredients for steel.

In part, the Woodside and Shell deals reflect a shift in China’s domestic energy market. Though natural gas typically competes with coal to supply power plants, China’s relatively low, state-set electricity rates and low prices of cheap — but dirty — domestic coal have made gas-fired power plants uneconomical. As a result, China’s coal-fired power plants pollute the country’s skies and make China the world’s second-biggest producer of greenhouse gases after the U.S.

However, a major market for natural gas has emerged among China’s growing urban middle class. Cities have switched to newly built natural-gas networks as a cleaner alternative to cheaper fuel such as coal-derived gas for cooking and heating. In an unregulated market, consumers in China’s richest areas such as Shanghai or Shenzhen are willing to pay more for a cleaner fuel as incomes rise.

China is looking to import more pipeline gas from its neighbors, including Russia, and is trying to develop domestic fields. But until now, LNG had stalled because China was unwilling to pay more after international prices rose.

Analysts have expected China would turn to the Middle East, especially Iran. But talks on a multibillion-dollar deal have dragged on for years. China sees Australia as a safer option. “Security of supply is paramount,” said John Harris, an analyst based in Beijing for energy consulting firm Cambridge Energy Research Associates.

Write to Shai Oster at [email protected]

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