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Exxon, China sign $41 billion Australian gas deal

By Fayen Wong and Tom Miles
/ Source: Reuters

By Fayen Wong and Tom Miles

PERTH/BEIJING (Reuters) - Australia and China struck their biggest trade deal on Tuesday, as the world's two most valuable listed oil companies, Exxon Mobil Corp and PetroChina , reached a $41 billion liquefied natural gas (LNG) agreement.

Exxon will supply LNG from the massive A$50 billion Gorgon LNG project on Australia's northwest coast, expected to have an output of 15 million tonnes per annum (mtpa) at its peak.

Chevron Corp is the operator of the project with a 50 percent stake, while Exxon and Royal Dutch Shell Plc each own a 25 percent stake.

The agreement with PetroChina follows Exxon's A$10 billion ($8.26 billion) deal with India's Petronet and means that buyers have now been found for Exxon's entire share in the Gorgon.

It comes at a time of trade and political tension between China and Australia and as China looks to soak up raw materials and energy supplies to fuel growth.

"It's a statement about the nature of our two economies and the fact that Australia is important to China, just like China is important to Australia," Australian Resources Minister Martin Ferguson told Reuters in Beijing.

As part of the pact, PetroChina will become the largest buyer of gas from Gorgon, receiving 2.25 mtpa of gas from the project for 20 years. That is on top of PetroChina's previous 20-year agreement signed with Shell for 1 mtpa.

With the regulatory approval process nearing completion in Australia, all of the Gorgon partners could officially approve the massive project as early as next month.

"The A$50 billion contract to supply PetroChina is a foundation contract that will assist in getting the Gorgon LNG project to final investment, and that again would represent the biggest stand-alone project in Australia's history," said Ferguson.


The diplomatic crisis between Australia and China was largely caused by China's arrest of an Australian citizen in an investigation into iron ore pricing.

China and Australia's No. 3 miner announced an iron ore deal on Monday.

The deal between Exxon and PetroChina, both of which have market capitalizations in excess of $300 billion, may go even farther toward mending the rift between China and Australia.

Ferguson said China had approved the deal, and does not expect political opposition in Australia.

He said the project is expected to start producing gas in 2015.

"Just think about it. One project will see about 6,000 Australian workers at the peak of construction and buy about $30 billion worth of Australian goods and services over the next few years," Ferguson said.

China has two operating LNG terminals, Dapeng and Fujian, with the capacity to import over 6 mtpa of LNG. The aim is to increase that amount to 50 mtpa by 2020.

A source with Chevron said the company was in talks to supply a similar volume of Gorgon LNG to PetroChina's smaller rival, CNOOC .

For Exxon, the contract could yield dividends when it seeks other deals with China.

Exxon's shares slid two cents to $66.53 on the New York Stock Exchange in late afternoon trading.

"They are playing for longer-term relationships, not a one-night stand," said Oppenheimer & Co analyst Fadel Gheit. "Obviously it's a very large market, the fastest growing one in the world."

CNOOC's Dapeng terminal imports gas from the North West Shelf project in Australia, and preliminary deals have been signed for supply from various proposed Australian projects to terminals under construction in China.

China's gas consumption is set to nearly triple over the next 10 years, potentially rising to around 18 billion cubic feet per day by 2020 and making the country the world's No. 3 gas market after Russia and the United States.

Most of that demand will come from domestic production, but given an expected government-driven rise in domestic gas prices soon, LNG could become an attractive alternative.

"Prices are relatively low so the Chinese are in a good position in terms of bargaining large supply deals," said Kenneth Medlock, an energy fellow at the Baker Institute for Public Policy at Rice University in Houston.

Despite the volume it is buying, PetroChina has not secured a minority stake in the project, pointing to buoyant demand for long-term LNG supplies despite the current economic downturn.

With a long list of around a dozen proposed LNG projects in the Asia-Pacific region, buyers are also eager to lock in supplies as quickly as possible from projects that are most likely to be developed.

($1=1.211 Australian Dollar) (Reporting by Fayen Wong and Tom Miles; Additional reporting by Chris Buckley Chen Aizhu in Beijing, Anna Driver in Houston, and Matt Daily and Ed McAllister in New York; Editing by Gerald E. McCormick, Toni Reinhold)