Thomas White Global Investing
Australia
Australia Stamp
August 28, 2009
A Postcard from the Asia Pacific
Australia: A $41 billion energy coup in China

Gorgon Deal

The Gorgon Project would be the single biggest construction project in Australia’s history and the government has imposed 28 conditions to protect the environment during the project’s course.

In the end, there were smiles all around. After recent months of tension between Australia and China, the signing of the new $41 billion energy deal was nothing less than a coup in Beijing and a boon for Australia. This was the largest ever trade pact between the two nations, and marks a significant step in China’s race to grab the Asia Pacific’s energy reserves for its growing, powerhouse economy.

Under the deal, PetroChina, Asia’s largest oil and gas company, will buy 2.25 million tons annually of liquefied natural gas (LNG) from Australia for the next 20 years. The gas will be drilled from the yet-to-be developed Gorgon Gas Field, lying on the north-west coast of Western Australia. The Gorgon Project is one of the most important works in Australia, whose scope includes three, five million ton per annum LNG trains; one of the world’s largest carbon dioxide injection projects; and a domestic gas plant. Simply put, it would become Australia’s largest ever resources project generating at least around 6,000 jobs with just this deal alone. Construction on Barrow Island may begin later this year, after the Australian government gave the final clearance for the pact.

Diplomatic channels in China and Australia worked overtime to secure the deal, which as Finance Minister Lindsay Tanner told the Associated Press was a ‘great piece of news for Australia’s economy.’ Tensions rose between the two countries in July after Australian Rio Tinto employee Stern Hu was detained by Chinese authorities on charges of stealing ‘state secrets.’

Subsequently, negotiations between the mining giant and China snapped, and relations reached a breaking point when Australia allowed entry for Rebiya Kadeer, a Uighur leader whom China has accused of instigating unrest in its troubled Xinjiang region.

With relations at such low ebb, it is remarkable that this deal was signed at all, but it indicates that Australia and China’s deeply entwined economic interests will remain untouched despite on-the-surface political tensions. Australia’s economy has been one of the healthiest among developed economies and much of its growth has been driven by China’s massive hunger for steel, driving demand for Australia’s iron ore sector despite the global slump.

Now China needs Australia’s gas, uranium and coal apart from its iron ore, and Australia has shown that it is eager to provide these key resources. China’s massive stimulus package, the government hopes, will turn its economy back to double-digit growth. A strong Chinese economy only means a vibrant Australian economy. It is no coincidence then that Australian investors watch anxiously for the latest indicators and data from the Chinese economy. The Gorgon deal is perhaps just one of many between these two countries – and the way the commercial and political relationship between Australia and China pan out over the next few years could well shape the global economy in the next decade.

 

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