Gas Deals Signal Shifts for China

BEIJING -- China's decision to sign two deals to import natural gas from Australia signals its willingness to pay more for cleaner energy and deepens economic ties with Australia as China shifts away from the Middle East for natural-gas 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, owner of a stake in Australia's giant Gorgon gas field, which is half-owned by Chevron Corp.

Valued at about $37 billion over 15 to 20 years, PetroChina's deal with Woodside Energy to import liquefied natural gas, or LNG -- gas that is supercooled for transport on ships -- was hailed in banner headlines 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 and one of the negotiators of the deal.

Underscoring the importance of the agreement for the two nations, the deals were signed on the sidelines of the gathering in Sydney of 21 leaders from the Pacific rim for the Asia-Pacific Economic Cooperation summit, including Australian Prime Minister John Howard and Chinese Premier Hu Jintao.

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 essential for China's rapid urbanization and racing economic growth.

The China deals also help secure the future of two of Australia's biggest natural-gas projects. Development and environmental concerns had dogged the Gorgon project, in which Royal Dutch Shell and Exxon Mobil Corp. each own 25% stakes.

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 and aspirations rise.

China is also 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.

Because of that, analysts have expected China would turn to the Middle East, especially Iran, which has some of the world's biggest fossil-fuel reserves. But talks on a multibillion-dollar deal have dragged on for years. It is also unclear if Iran, which is under U.S. sanctions for allegedly sponsoring terror, could develop the fields.

China sees Australia as a safer option. "Security of supply is paramount," said John Harris, a Beijing-based LNG analyst at energy consultancy Cambridge Energy Research Associates.

Meanwhile, Woodside, in getting China to sign up at an early stage of the field's development, is helping protect its investment. "What's innovative for Woodside is to secure a foundation customer at an early stage, so Woodside and its partners can push forward development as quickly as possible," Woodside's Mr. Gilboy said.

Nonetheless, the deals with PetroChina, the Hong Kong-listed arm of China's state-owned China National Petroleum Corp., aren't final, and it will be years before any gas is delivered. PetroChina's American depositary receipts are traded on the New York Stock Exchange.