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BG Group, the oil and gas producer, is poised to sign a contract worth an estimated $40 billion — a record for the company — to supply natural gas to China. The 20-year deal to supply liquefied natural gas from coal-seam gas deposits in eastern Australia is being finalised today in Beijing with CNOOC, the Chinese state-controlled oil producer.

The contract is the largest LNG supply deal yet signed by BG and comes almost a year after the two companies agreed preliminary terms, under which CNOOC is to acquire 3.6 million tonnes of LNG a year, shipped from BG’s proposed export terminal in Queensland. It is also the latest in a string of huge deals in Australia’s rapidly evolving coal-seam gas industry, where a landgrab for resources is under way between the world’s biggest energy companies.

Royal Dutch Shell and PetroChina agreed this week to buy Arrow Energy, an Australian coal-seam gas producer, for $3.15 billion. BG, which declined to comment on the CNOOC deal, will supply the gas from coal-seam production sites several hundred kilometres inland, from where it will be piped to a planned LNG terminal at the port of Gladstone. CNOOC operates three LNG import terminals along China’s coast and has plans to construct several more.

As part of the agreement, it will acquire 5 per cent of BG’s coal-seam gas interests in the Surat Basin in southwestern Queensland. The Chinese company will also hold a 10 per cent stake in an LNG processing unit. China’s booming economy is driving a surge in demand for energy. Last month, Chinese oil demand soared nearly 17 per cent to a record high of 8.5 million barrels per day, compared with February 2009.

It was the sixth consecutive month that China, the world’s second-largest oil consumer after the United States, posted double-digit annual growth in demand. Beijing is keen for natural gas to play a bigger role in its energy mix because it is a cleaner fuel than crude oil and coal. Coal-seam gas is a type of natural gas that is trapped within coal deposits. With the depletion of conventional gas deposits, it is considered an increasingly important fuel to supply Chinese demand.

Fu Chengyu, CNOOC’s president, will sign the deal with Frank Chapman, BG’s chief executive, today. Last month, BG announced plans to raise capacity at its Gladstone LNG terminal to 8.5 million tonnes a year, from 7.4 million tonnes. A final investment decision is expected this year. Separately, BG said yesterday that it had agreed to sell its three gas-fired power plants in America to Energy Capital Partners, a private equity firm, for $450 million.  

Foreign supply key to future demand Natural gas may be the fastest-growing fuel in China’s energy mix, but it is not advancing quickly enough to meet demand . This winter, the Government of Hangzhou, in the country’s east, was forced to cut all gas supplies to entertainment businesses to guarantee supplies to the city’s 410,000 households. It also reduced supplies to hotels, offices and shopping malls by 20 per cent.

There were similar scenes in Chongqing in the country’s southwest as China struggled with acute shortages after severe winter weather. Surging Chinese demand for natural gas is unlikely to end soon. With its economy powering ahead, consumption this year is expected to reach 110 billion cubic metres, up more than 37 per cent from 80 billion cubic metres only two years ago. By 2020, it is expected to need at least 200 billion cubic metres a year.

These growth rates are offering huge commercial opportunities for foreign oil companies and Australia is emerging as a pivotal player. Vast deposits of coal seam gas in Queensland, as well as large conventional gas reserves off the coast of Western Australia, are viewed as critical to meeting future demand. Official pressure is contributing to demand. Beijing is concerned about reliance on coal and is trying to develop alternatives to cut emissions and improve air quality. It has also begun a programme to convert millions of cars to run on natural gas as well as oil.

 
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