Western Australia’s liquefied natural gas producers are poised to benefit from rising demand from China, but must overcome cost challenges and intensifying competition from other large-scale gas producing countries, including Qatar and the United States.
It has only been 11 years since the first shipment of LNG from the North West Shelf joint venture was delivered to China’s first LNG receival terminal in Guangdong, and around 15 years since the first sales and purchase agreement for the supply of LNG from an Australian gas field was reached.
But LNG is set to become a major energy source in China, as the country moves to a comprehensive clean energy agenda and reduces its reliance on coal-generated electricity.
LNG currently makes up about 6.3 per cent of total energy consumption in China, according to Chinese Overseas Development Association president Hu Weiping, who was in Perth recently to present a paper at the Western Australia China Petroleum Association’s inaugural Australia and China LNG Forum.
Mr Hu said forecasts showed LNG consumption would grow to around 10 per cent of China’s energy mix by 2020, and to 15 per cent by 2030.
Last year, China imported 26.15 million tonnes of LNG, up by 33 per cent compared with 2015.
Nearly half of that gas came from Australian operations, accounting for 47 per cent of China’s LNG imports.
By 2020, China is expected to consume 60 million tonnes of LNG per annum, rising to 100mtpa by 2030, while Mr Hu said he expected consumption would increase to between 300mtpa and 500mtpa over the next 30 to 50 years.
To take advantage of that rising demand, Mr Hu urged Australian gas producers to gain more understanding of Chinese LNG policies, and to deepen their dialogue with Chinese LNG importers through collaborative research.
Economic and commercial consul to the Consulate General of the People’s Republic of China in Perth, Wei Liang, told the forum the Chinese government was committed to cleaner energy production.
“Green, low carbon and sustainable development is a global trend and the revolution of new energy is just around the corner,” Mr Wei said.
“During this transition, it is believed that LNG, being the most reliable, efficient, clean and convenient conventional energy, will still play a pivotal role in terms of cutting carbon emissions and contributing to the abatement of climate change.
“Over the years, China has been sparing no effort in tackling its own pollution issues.
“And in the global context China is committed to being a responsible member of the Paris Accord and an active player in climate change governance.
“To this end, on both a commercial and a political level, China is expected to have a growing need for Australian LNG, and I must say it is in both sides’ interests that we carry out further cooperation on LNG, under the auspices of our 45-year diplomatic relationship.”
However, Poton & Partners LNG adviser Daryl Houghton told the WACPA forum Australia would likely face stiff competition in satisfying that demand, primarily because of the high costs of developing LNG projects.
“The development of LNG projects in Australia in the last decade has not gone well,” Mr Houghton said.
“The cost overruns on projects has usually been pretty substantial and the two that stand out are the Pluto project, which ran over by about 50 per cent on its budget, and the Gorgon project, which ran over by about 40 per cent on its initial budgets.
“There are definitely real issues around developing LNG projects in Australia that are cost-based.
“Cost is not the only issue but it is certainly one that makes it a little more challenging to develop projects in Australia.”
Mr Houghton, who has worked in the LNG industry for more than 35 years, said the fiercest competition to cater for China’s increased demand would likely come from Qatar.
“There’s been a sleeping giant in Qatar that’s not been too interested in expanding its LNG industry for the last decade, but they seem to have finally awoken from that slumber,” he said.
“Having lifted a moratorium on increasing production from the north field, there are certainly now plans on the table that they will increase their production by anything up to 25mtpa.”
Mr Houghton said US-based producers were also looking to increase production, with government regulations and approvals processes seemingly being relaxed, stoking a new wave of LNG development.
In the longer term, Mr Houghton said Mozambique and other east African countries would become major players in the LNG supply world by 2022 or 2023, with a similar phase of activity ramping up.
Australia’s comparative advantage in supplying China, however, comes from having a long-established relationship with Chinese state-owned enterprise China National Offshore Oil Corporation (CNOOC).
CNOOC was responsible for the first LNG shipments from the North West Shelf to China, and in 2002 signed an agreement that entitles it to around 5.3 per cent of North West Shelf joint venture reserves and titles.
Other participants in the North West Shelf joint venture include BHP, BP, Chevron, Japan Australia LNG, Shell Australia and Woodside Petroleum.
CNOOC has five subsidiaries based in Australia, three of them in WA and two in Brisbane, employing 42 staff across those operations.
CNOOC Australia managing director Lu Yongfeng told the WACPA forum the company accounted for 65 per cent of total LNG imports to China.
As well as gas sales arrangements at the North West Shelf and Gladstone LNG in Queensland, Mr Lu said CNOOC had fabricated modules for Chevron’s Gorgon LNG project in WA and Inpex’s Ichthys project off the Northern Territory coast.
In April 2010, CNOOC signed one of Australia’s biggest ever gas deals, to buy 3.6mtpa of coal seam gas from BG Group, an arrangement that analysts estimated to be worth between $60 billion and $70 billion.
In total, CNOOC has invested more than $US8 billion into Australian LNG projects.
Mr Lu told the WACPA forum that CNOOC would continue to play an important role in the development of Australian LNG projects, as it sought to expand and lead the Chinese LNG market.
“Australia is rich in natural resources; its capacity is increasing and Australia’s energy market is getting more flexible,” Mr Lu said.
“Australia is politically stable, and geographically it is advantageous to our market.
“We have established good business relationships.
“We are quite sure we understand it very well, technically we know the industry more deeply than when we first came, and also, Australian suppliers know the Chinese market.
“By coupling our efforts and our passion and energy, we will achieve more cooperation on the horizon.”