As China secures international sources of energy and its economic and security concerns expand, it will devise energy security policies that safeguard its interests, but also provide opportunities for Western Australian producers.
With its strong economic growth and industrialisation over the past decades, China’s energy demand and supply patterns have changed substantially.
China’s energy policy most visibly impacted on Australia after 2003, when its energy demand departed from historical norms and a supply side shock reverberated in worldwide commodity markets.
Increased Australian export volumes of thermal coal and natural gas to China were part of this trend. With greater exposure to China’s economy, fluctuations in growth influenced the price of Australian seaborne coal as well as the spot price of LNG sent to East Asia.
Around this time, China’s economic and market indicators were reported in mainstream nightly news reports. Most Australians are now aware of China’s economic growth and energy demand.
However, China did more than passively buy energy products through world markets. To mitigate supply disruption, Chinese companies have secured equity stakes in natural gas fields and coal mines.
This also occurred in Australia. Beyond energy and energy resources, China’s acquisition of Australian electricity transmission assets was uncontroversial until China’s State Grid attempt to purchase a controlling stake in the country’s largest electricity network, Ausgrid located in New South Wales, was blocked by Treasurer Scott Morrison.
By the time of the proposed acquisition of Ausgrid, State Grid already had interests in Victoria’s SP AusNet and South Australia’s ElectraNet.
An early 2017 proposal from Powerchina (Power Construction Corporation of China) to build a 250-megawatt natural gas fired generator in South Australia is part of the trend of exporting capital, technology and energy services.
At a reported cost of $350 million, and potentially operating by mid-2018, formal details are yet to be released. However, the timing of information reaching the public realm may indicate a greater level of sophistication in public relations of Chinese SOEs. Released early in 2017 after minor blackouts in the state, and following a system-wide collapse in late 2016, indicates an intention to minimise public backlash or concerns.
Despite the significant changes to China’s domestic energy production profile, Australian interest in this topic tends to peak when there is proposed acquisition which captures public attention or is thought to impact on national security.
A similar observation can be made about the agriculture and mining sectors, which also reflect Beijing’s attempt to lock in raw material supply chains to the source of production.
The implications of China’s energy strategy for WA vary to those for the east coast. The lack of a major coal export sector is one notable difference. Based on discussions with security analysts and industry participants, there are four key areas which deserve attention:
- LNG export markets: WA’s LNG industry has been largely focused on East Asian export markets. As Japanese and Korean markets mature, China’s demand for natural gas remains an important variable. This is exacerbated by efforts to shift to spot pricing and a depressed price outlook to the early 2020s. Decisions by China over its energy and industrial policy will be an important driver for demand of WA’s natural gas. In the longer term, this will influence brownfield expansion and the next wave of LNG investments.
- Natural gas reserves: Linked to natural gas demand are efforts by China to directly secure energy reserves. Acquisition of part ownership of WA gas fields is largely uncontroversial. However, should depressed prices change asset valuations, this could change. The prospect of China seeking to buy smaller gas-related companies and gas fields in the state is a distinct possibility. When linked to the politically sensitive issue of domestic gas supply and pricing, there is potential for such deals to become subject to greater debate.
- State electricity assets: In 2016 the the Barnett-led state government proposed the sale of the government-owned electricity transmission and distribution entity Western Power. The sales process will not proceed due to the result of the March 2017 election. However, with significant levels of state debt, privatisation of WA electricity utilities, including generation and retail assets, remain an option. Despite being relatively small companies, an open sales process for these utilities could draw attention from Chinese buyers. As with Powerchina in South Australia, acquisition of gas power generation assets (and greenfield expansions) may be timed after an energy crisis or incident, making popular acceptance more palatable.
- Energy products and services: It is likely China’s efforts to export energy products and services will accelerate, especially if its domestic economy slows. The proliferation of cheap household photovoltaic panels and equipment across Perth buildings is the first phase of this trend. Greater levels of Chinese electricity equipment, consumer goods and smart grid technology will be attractive to WA companies and individuals. This will not necessarily trigger a decision like the government ban on Huawei the Chinese telecom giant, participating in the National Broadband Network. However, should WA's critical infrastructure or systems become dependent on Chinese energy technologies there may be an eventual push back or restrictions imposed.
• Andrew Pickford is a strategist and economic policy specialist at Perth USAsia Centre.