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Jaws clenched over LNG deals

Tension between the top two Liberal politicians in WA could bubble to the surface again soon over the oddest issue, China. Specifically, which China?

The Premier, Richard Court, has made no secret of his love for mainland China. He has been a regular visitor for the past few years drumming up trade connections and trying hard to get a Chinese signature on a liquefied natural gas purchase contract. Court oozes optimism about the chances of a deal with Beijing.

Energy Minister, and Premier-in-waiting, Colin Barnett is less optimistic. He tells a more cautious tale about doing business with the mainland. At one briefing he even went as far as to mildly castigate potential LNG exporters about the need to work harder to win China, even suggesting they would do well to open a full-time Beijing office because the competition was stiff.

Barnett’s criticism was muted but could easily be taken as an implied attack on the Premier’s excessive enthusiasm for the mainland.

It may yet turn out that the Premier has been flogging the wrong horse. The China most likely to sign up for LNG from WA is Taiwan, as demonstrated by the recent under-standing struck between the gas export consortium Australian LNG (which is led by Woodside) and a Taiwanese power utility.

If Taiwan does sign with Australia, a degree in history is not required to know that the mainland will be less than amused – and that means that Court’s grand China strategy will be left in the dust.

The interesting part is that the Premier’s China strategy may actually have been in the dust for many months – something Barnett knew but let his boss waffle on for a while so that he would look really stupid when it collapsed.

In October, one of the world’s biggest banks quietly slipped a report into the marketplace seriously questioning whether China was a dinkum potential LNG customer for Australia. Deutsche Bank questioned, in a study of Woodside, whether selling LNG to China was “potential or peril”.

The bank said China looked good “on paper”. However, many issues remained unresolved, describing China as “very deep blue sky”. Problems listed were the complete lack of receival terminals (and the potential need for suppliers to help pay for infrastructure in China), serious issues over Chinese buyers honouring purchase contracts if times get tough, the importance of the coal industry to the Chinese economy even if it is a bad polluter, and competition for the China market from Middle East exporters...“with price being the likely determinant of success”.

Woodside’s problem (as discussed in a separate item) is that it is a relatively high-cost LNG producer, a point which is annoying its biggest shareholder, Royal Dutch/Shell.

Woodside is likely to miss the China market because the cheapest gas will win and because it lacks the financial muscle to help China build a receival terminal.

Something which a lot of people other than Premier Court seem to have known for some time.

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