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Shell spells out China growth fears

Mathew Dunckley and Angela MacDonald-Smith

The Chinese economy could be in worse shape than official figures suggest, threatening demand for Australia’s resources at the same time as increasing international competition and rising costs spell trouble for this nation’s fledgling gas boom, says one of Royal Dutch Shell’s top global ­executives.

Shell global downstream director Mark Williams said the energy giant was experiencing the equivalent of recession-level demand for key products such as diesel at the same time as China, one of the single largest markets, was posting official reports of strong growth.

“The global economy seems weaker to me than the numbers indicate,” said Mr Williams, who sits on Shell’s global executive board. “I still expected more suction out of China than we’re getting. I’m just a bit uneasy with what we’re seeing in terms of fuel demand and chemical demand.”

China’s power consumption growth slowed last month as its manufacturing sector, which accounts for more than half total electricity demand, experienced a significant slump in new orders.

Mr Williams described Shell’s Geelong refinery as a “borderline” proposition. He also warned that the development of Australia’s gas reserves was facing challenges from high costs and new resource discoveries in competing markets.

“On the upstream side you’ve got to go where your opportunities are. Australia is not the easiest place . . . from an upstream standpoint, although there are vast reserves here, and that’s the cost issue,” he said. The Minerals Council of Australia warned on Monday that projects were at risk due to Australia’s high cost structure, prompting Federal Resources Minister Martin Ferguson to say yesterday that the issue must be addressed.

“We as a nation must be conscious of the cost of delivering projects in Australia and the challenges this environment presents to potential investors,” Mr Ferguson said.

His comments follow warnings on costs on LNG projects from a string of senior executives including Shell, Chevron and ExxonMobil in their August briefings with investors.

They also reinforce Shell chief executive Peter Voser’s description of Australia as a construction “hotspot” and his warning that projects would have to be slowed to avoid the worst of the cost pressures.

That heightened speculation around the timing of Shell’s and Petro­China’s $US20 billion-plus Arrow Energy LNG venture in Queensland and Woodside’s Browse LNG project in which Shell has just increased its stake. In June, Shell’s board visited the country to inspect gas projects in Queensland and in the north west and to visit Perth.

Mr Williams said other large fields were also being developed in Africa and America which could rapidly increase the amount of gas in the global marketplace and put further focus on Australia’s competitiveness.

“I wouldn’t go so far as to say as projecting a gas glut, but you know as technology around LNG improves it is certainly possible that Australia could be facing a level of cost competitiveness from these other resource plays that make it less likely that these reserves will be developed at paces that people used to think,” he said.

As had happened in other countries, Australia’s capacity constraints had exacerbated costs, he said.

“You run out of people and you run out of logistics. I think there are obviously some things that can be done about that in terms of the flexibility of the workforce and training, immigration policy,” he said. Shell backed the Business Council of Australia’s finding that Australian labour was more than 40 per cent more expensive than that available on the Gulf Coast.

Mr Williams said the difference between northern Canada and the Gulf Coast was close to 2 per cent.

Unconventional gas production, such as shale or coal seam gas, could also pose a challenge for Australia’s gas aspirations if America’s rapid growth in the resource was matched elsewhere particularly in countries such as China and South Africa, he said.

“It’s a huge deal. It could be quite revolutionary if substantial resources were found in those places,” he said. “I think it could have, I wouldn’t say a chilling effect, but it could slow down the development of LNG.”

Mr Williams said that process would take 20 to 30 years to play out because of the need for infrastructure and operational scale. “I think LNG has got a pretty good run for a while. And may have a good run for a long, long, long time depending on the pace of this shale gas thing,” he said.

He also strongly backed the controversial fracking process, saying that in a technical sense it was “entirely benign”. But the industry had not done enough to convince politicians and the public of the merits of the process. “You have to have the science on your side . . . but ultimately you have to rely upon governments,” he said.

“You have to have governments with a broader perspectives on the issues that, frankly, overrides the local interests. You can’t ride roughshod over the local interests.”

Tony Regan, an LNG consultant at Tri-Zen International in Singapore, said Australia was pricing itself out of the market because costs were running ahead of cheaper supply options emerging in North America and eastern Africa.

“You’ve even got the head of Shell being very explicit in saying these are the most expensive projects in the world right now,” he said.

“That certainly shouldn’t be happening. That should be somewhere like Sakhalin [eastern Russia] and Shtokman [Russian Barents Sea] where they are ice-bound rather than sunny Australia.”

Bernstein’s Hong Kong-based energy analyst Neil Beveridge said China’s oil demand in August was down 0.4 per cent year on year, the third month of negative growth this year, while crude imports were the lowest in the last 22 months, and were down 12.5 per cent from a year earlier.

“China’s economic and energy indicators in August continue to show little improvement from July, highlighting sustained weakness in the Chinese economy,” he said.

“Following the weakest GDP growth since early 2009 – 7.6 per cent in the second quarter – some energy indicators in August showed a significant deceleration from a year ago.”

The Chinese economy officially grew at 7.6 per cent in the year to the end of June but Shell’s Mr Williams said the accuracy of Chinese economic data was a cause for concern.

Westpac Institutional Bank chief currency strategist Robert Rennie said key commodity markets such as thermal coal, steel, iron ore and coking coal suggest real economic growth in China was lower than the official numbers suggest.

“What that does do is that it adds to the risk we’ll see softer rates of growth in the third quarter as we work through that inventory overhang.”

“Every discussion and every time they redo the numbers they bring them down a little bit. That sort of downward trend of projections is always fairly ominous because you get this sense that the numbers aren’t really adding up,” he said.

with Jacob Greber

The Australian Financial Review

Mathew Dunckley

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

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