Gas producers to cash in on CNOOC's long game

Gas producers to cash in on CNOOC's long game

Tue, 28/11/2017 - 08:03
Yongfeng Lu

UPSIDE: Yongfeng Lu says there are considerable benefits in China-Australia cooperation. Photo: Philip Gostelow

LNG ship
Sino Gas Linxing

Fifteen years ago, a 25-year agreement between the operators of what was then Western Australia’s only operating liquefied natural gas development and China National Offshore Oil Corporation was hailed as one of the most significant deals in the state’s economic history.

When the agreement was signed, gas had been exported from the North West Shelf, a mighty $34 billion joint venture between the world’s largest oil and gas conglomerates, for 13 years, but only to customers in Japan and Korea.

WA’s LNG export industry was worth around $4 billion in 2002, with North West Shelf joint venture partners Woodside Energy, BP, BHP Billiton, Shell, Mimi and Chevron the exclusive exporters of WA gas.

It took another four years before the first cargo of North West Shelf gas reached CNOOC’s Guangdong LNG receiving terminal, the first of more than 500 shipments that have been made under the arrangement.

But according to CNOOC’s chief Australian representative, Yongfeng Lu, the deal which facilitated the first importation of gas to China from any country in the world had a much longer gestation.

Mr Lu said the arrangement had its genesis in the late 1970s, when China embarked on a comprehensive set of reforms introduced to rapidly grow the country’s economic capacity.

“Since reform policies were introduced in 1978, we have seen very fast growth, and petroleum, diesel and gas, have been the engine for growth and the development of the economy,” Mr Lu told Australia China Business Review.

“In China, before 1978, domestic supplies were sufficient.

“Since the 1978 reforms, demand has grown, and policies encouraged companies to not only employ resources in China, but also to take advantage of employment of overseas resources as well.”

China is now the largest energy producer in the world, however, Mr Lu said the country’s domestic gas operations were not able to supply enough gas to keep up with demand.

Last year, domestic gas production in China was 150 billion cubic metres, well short of the 224 billion cubic metres of gas consumed in the country, according to data from the USA government.

Bridging that shortfall is the key function of CNOOC, a state-owned-enterprise, which was initially established in 1982 to develop oil and gas resources in the east and south China seas.

Over the past decade, CNOOC has been steadily growing its international operations, and now operates in more than 40 countries.

And it doesn’t just import or explore for gas – CNOOC also provides engineering and technical services, fabrication and manufacturing, refining and marketing and power generation.

Mr Lu said CNOOC’s introduction into the North West Shelf joint venture was a key turning point in it finding future agreements with the project’s participants, but also for the development of Australia’s LNG industry.

“It was really an outstanding deal, the transaction that was done,” Mr Lu said.

“It got bipartisan support, people could see a lot of value, and not purely in terms of the value of the transaction, it was also the opening of a new area for

“It could be considered the second largest economic event (in WA history), similar to when iron ore projects in the Pilbara region started exporting to China.

“The relationship between Australia and China has benefited from our ongoing participation in the project, the business and economic relationship between the two countries is growing fast and becoming bigger every day.

“Our project has played a role in bringing the countries together as well.”

Since landing in Australia, CNOOC has invested more than $US8 billion into operations not only in WA, but also in Queensland.

“Following our investment in the North West Shelf, we then looked at other opportunities,” Mr Lu said.

“The oil and gas business is a long-term business, we are not taking a short-term viewpoint.

“Not only is it just taking gas from Australia to China, we have also committed to find more oil and gas here.

“We have been involved in a few exploration acreages, in the Carnarvon Basin, in the Bonaparte Basin, and the Browse Basin.

“We took advantage of our experience here, our knowledge came from our involvement in the North West Shelf.

“That gave us the confidence to do more business here in oil and gas exploration and production.”

CNOOC’s largest investment, however, was with BG Gas in Queensland.

In 2009, CNOOC signed a deal to buy 3.6 million tonnes of gas each year for 20 years, from Australia’s first producing coal seam gas project, BG’s Curtis LNG operation.

While terms of the deal were never officially disclosed, analysts described it as Australia’s largest ever trade deal, estimating it to be worth between $60 billion and $70 billion.

However, there is potential for that to be surpassed, with industry forecasts predicting China’s demand for LNG is set to skyrocket.

China’s commitment to phase out coal as the primary source of its energy production, known as its clean energy policy, is looming as a boon for the LNG industry, particularly in Australia.

The Chinese government’s 13th Five-Year Plan, covering 2016 to 2020, included a commitment to increase the proportion of natural gas in the country’s energy consumption mix to 10 per cent, from around 6 per cent currently.

As a result, gas is China’s fastest-growing fuel source, with LNG imports increasing 39 per cent year on year in the first four months of 2017.

Those imports are forecast to increase from 27 million tonnes in 2016, to 45 million tonnes in 2019, according to the federal Department of Industry, Innovation and Science.

And with four producing LNG operations in the north of WA, and another project – Shell’s ground-breaking Prelude floating LNG – due to start producing early next year, the upside is significant for the state.

In 2016-17, WA increased the volume of its total LNG sales by 37 per cent, to 28.7 million tonnes, with those sales valued at 12.7 billion.

Australia is poised to become the world’s largest exporter of LNG by next year, with around 88 million tonnes to be exported from the country.

WA’s share of those exports is expected to be around 50mtpa, as projects such as Chevron’s Gorgon and Wheatstone, as well as Woodside’s Pluto, ramp up, according to the latest data available from the WA Department of Jobs, Tourism, Science and Innovation.

Thanks to WA’s domestic gas reservation policy, LNG projects off the state’s coast won’t be subject to further export restrictions, placing producers at a distinct advantage to east coast counterparts, coming under increasing scrutiny as supply falls short to eastern states markets.

Mr Lu said that while WA gas fields often had high costs of development, there were several other operational advantages for Chinese companies participating in Australian projects.

“Cost is one parameter that you go through in your evaluation process,” Mr Lu said.

“We were offered conditions from other companies that were better than what was offered in Australia, but our conclusion was based on all of the aspects of the offer, including where the project was located, the country, the geographical matters and the most important parameter, the reserve base.

“Apart from the advantage in terms of reserve base or in terms of existing production and supply capacity, other elements like sovereignty, the fiscal regime, political stability and understanding and relationships between two countries, and people understanding each other come into play.

“Australia is a firm foundation for growing the LNG business in China.”

CNOOC’s commitment to becoming a significant player in Australia’s LNG industry has also paved the way for other Australian businesses to expand through Chinese cooperation, and has also helped to dispel some myths about Chinese investment, according to Mr Lu.

“For Chinese companies, we didn’t come here and just take away oil resources, that is not fact,” he said.

“We come here and invest, and we contribute tax revenue; just in the case of CNOOC at the North West Shelf, we’ve contributed more than $700 million in royalties, GST and income tax.

“We are also working together with people in the community; we would like to emphasise that is our philosophy and our vision.

“Wherever we operate, we work together in strict compliance with the customs of the local community and also take great consideration of local people’s interests to create more harmonious relationships with the community, local governments and the local environment.

“It’s a real win-win approach.”

One Perth-based company benefiting from that win-win approach is Sino Gas & Energy, which is listed on the Australian Securities Exchange and is advancing plans to develop assets in China’s Ordos Basin, the country’s largest gas producing area.

Under Chinese government regulations, foreign companies seeking to develop gas assets must partner with a state-owned enterprise.

In October 2013, Sino Gas & Energy signed a production sharing contract with China United Coalbed Methane, a subsidiary of CNOOC which began exploring for coal seam gas deposits in 2012.

The agreement gave China United the rights to 30 per cent of production at Sino Gas & Energy’s Linxing PSC, which was identified as a strategic project under the latest Five-Year Plan.

Late last month Sino Gas & Energy announced it had submitted its overall development plan to China United for approval, a significant regulatory milestone on its planned pathway of becoming a major low-cost gas producer in China by 2020.

Sino Gas & Energy is targeting production of between 350 million and 550 million standard cubic feet of gas per day by 2022, with the development plan to be funded by existing cash and a new $US100 million debt facility with Macquarie Bank.

More deals like Sino Gas & Energy’s arrangement are expected to emerge in coming years, particularly after President Xi Jinping vowed to open China’s economy further to the world on the first day of the 19th Communist Party Congress.

Mr Lu said Chinese state-owned-enterprises and large conglomerates saw Australia as a very important area for business.

“We also think the dynamics could be enlarged in the cooperation area, tangibly and intangibly,” Mr Lu said.

“It’s happening now – lots of large Australian companies together with many Chinese companies are doing business in joint ventures outside Australia, in the Asia Pacific, in India and in Africa.

“Many Chinese companies here are also expanding, even beyond Australia’s

“That is their business model and could create a winning situation, coupled with the two sides’ advantages.

“By coupling management experience, manufacturing capacity, market knowledge and penetration, your position could be made even better.”