China’s economic rise has been great for Australia. The resource-rich nation has gladly fed China’s hunger for cheap energy and industrial materials. Since China’s accession to the WTO in 2001, Australian household incomes nearly tripled while the population of the country surged.
Yet all is not well in the land of Oz. Since 2016 Australia, the world’s second-largest gas exporter, has faced the chronic threat of domestic gas shortages, spawning public showdowns between politicians and gas companies over exorbitant gas prices. In late 2017, Japanese firms announced in February the construction of natural gas import terminals in what will soon be the world’s largest exporter of liquefied natural gas.
This comes at a time when Australia’s own production and exports are soaring. Australia is projected to overtake Qatar — which exports twice as much LNG as Australia does — as the world’s largest LNG exporter by 2020.
Bruce Robertson with the Institute for Energy Economics and Financial Analysis said that the construction of a new import terminal “is on the same level as Saudi Arabia building an oil import terminal. It is the most absurd proposition.” Absurd or not, companies are responding to reports that domestic gas prices in some areas have climbed by 500% between 2015 and 2017.
The US Energy Information Agency reported in October that it expects Australian domestic gas prices to continue to surge while domestic production increases and consumption declines. Although Australian gas producers have benefitted from lucrative export arrangements with Asia, ordinary Australians are left to foot permanently higher bills.
For Asia’s developing economies, natural gas is providing an alternative way to develop energy systems other than the coal-intensive strategies used by western economies. Large, poor countries like those of southeast Asia can avoid tens of thousands of premature deaths by replacing coal with gas which emits little none of the particulate matter that causes such deaths and just 50% of the CO2.
More significantly, natural gas is becoming much cheaper than coal as vast new reserves have become exploitable thanks to the fracking revolution. With Chinese demand surging ahead, Asian countries are expected to double their demand for natural gas as early as 2025.
For China, natural gas is the key weapon in its fight against smoggy cities. In December, notoriously smoggy Beijing achieved air quality of “excellent” or “good” for a 25-day stretch partially as a result of a herculean effort to switch some 6 million households from coal to natural gas for heating and electricity. Yet for such laudable achievements to stick, coal will need to be phased out altogether.
As a result, China has developed an insatiable appetite for natural gas. In some ports in China’s north and central coastal regions, liquefied natural gas imports actually exceeded import capacity by up to 30 per cent.
Meanwhile, Chinese firms inked hundreds of billions of dollars worth of natural gas production and imports with American firms. The China Energy Investment Corporation pledged an $83.7 billion investment to develop natural gas in West Virginia, hopefully provided a much-needed boost to the ailing economy’s growth. There is no doubt China’s energy needs are growing, but the energy sourced from such agreements far exceeds this need, implying that China is looking for a replacement for its belching, toxic coal-fired power plants.
China’s move to diversify its energy supply away from its coal dependence— which includes its moves to add renewable energy — is part of its strategy to secure its vulnerable trade routes. With nearly all global trade done overseas, China’s leaders clearly fear the possibility of the US using its military bases and alliances to choke China’s energy and trade routes in the event of hostilities.
Nearly half of China’s trade cruises through the disputed South China Sea including around 80% of its petroleum imports. Any ship travelling between China and Africa, Europe, Southeast Asia, the Middle East, or Australia has to travel through one of several tight straits. Most of these choke points are beyond the Chinese ability to project power, well behind America’s string of bases and military alliances that control access to these choke points.
As a result of its vulnerabilities, China has built into its Belt and Road Initiative — its blueprint for deepening trade across Eurasia and signature foreign policy initiative— new gas and oil pipelines which would effectively circumvent the South China Sea.
China’s National Petroleum Corporation is considering financing one of Myanmar’s planned gas import terminals. Although Myanmar has pipelines to deliver gas to China, it currently has very little capacity to produce and sell its own gas. Shortly after celebrating the completion of its oil pipeline with Myanmar last year, China announced plans to expand the gas portion of the pipeline to new ports in Myanmar’s east, closer to Australian gas fields than existing ports.
From: Consortium of US Defense Analysts
Of course, one problem with the pipelines China has proposed is that many run right through highly unstable areas or undemocratic regions. China’s gas and oil pipeline through Pakistan crosses disputed territory with India, running dangerously close to anarchic parts of Waziristan, and terminates in coastal Balochistan which is the site of a long-standing separatist movement. Oil and gas contracts are typically written on multi-decade long terms which heightens the likelihood of disruption due to simmering tensions in the area either between India and Pakistan or among the various ethnic and insurgent groups vying for political influence in Pakistan.
China’s second pipeline terminates in Rakhine state in Myanmar. In recent years, Myanmar’s military has undertaken a genocidal policy of expulsion towards some of the Muslim inhabitants of Rakhine state, known as the Rohingya. Nearly half a million fled to Bangladesh in 2017 leaving behind burned villages and embittered ethnic rivalries. Following these purges, the military-dominated government expropriated the land formerly held by Rohingya communities and laid claim to the rich natural gas resources and lucrative pipeline transit fees that formerly went to provide services to the people of Rakhine.
China might not have an interest in demanding other regimes respect human rights, but instability and violence is, if nothing else, bad for business. Due in part to security tensions Myanmar’s new pipeline to China was beset by delays and sat empty for two years.
Although China might want to turn to other southeast Asian countries to meet its need for gas imports, such countries often lack the necessary political and physical infrastructure to quickly develop the capability to export gas to China. Vietnam and Indonesia rank 63rd and 64th in infrastructure development out of 160 countries. Malaysia — the world’s third largest LNG exporter — does much better, coming 32rd, but still falls behind Australia.
In the last two decades, nearly half of southeast Asian nations have experienced insurgencies. Even in peacetime, both Indonesia and Malaysia are wracked by ethnic divisions which create lingering violence even after major hostilities have stopped. Worryingly, Indonesian gas reserves are dwindling, requiring a fresh infusion of new infrastructure to exploit new fields. By contrast, Australia already has most of the needed infrastructure — gasification terminals, wellheads, pipelines, roads, etc. — built up and remains a highly prosperous, stable society.
All of this means that Australia has never looked so important to the Chinese and broader Asian energy markets.
In 2017, Australians became acquainted with what increased importance to China looks like. The year opened a host of fears about the nefarious effects of Chinese Communist Party influence on Australia’s domestic politics. Media reports alleged that Chinese party members had attempted to bribe or influence high-profile politicians and academics into promoting China’s interests. The year closed with a bitter exchange between Prime Minister Malcolm Turnbull and the Chinese government over China’s use of foreign aid to spread its influence in the South Pacific. China clearly wants a stronger hand in regions critical to its energy supply. Whether they are allowed one depends upon the strength and willingness of opposing powers to resist their influence.
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