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‘Next in Beijing's crosshairs?': LNG worries surface amid China stoush

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Deepening tensions between Australia and China have reignited fears across the energy sector that they might spill over into shipments of liquefied natural gas, one of Australia's biggest exports.

a large ship in the background: 16.10. 2015 . AFR.  Santos first Cargo Gas ship to korea. Gladstone. Image Robert Shakespeare. .www.robertshakespeare.com. 0404507257 Santos ship LNG

Following the "indefinite suspension" of the China-Australia Strategic Economic Dialogue, a key diplomatic channel, resources analysts are warning Chinese investment in Australian projects would be further discouraged while black bans on Australian coal and copper were likely to "remain in place" until relations improve.

However, questions have been revived in recent days about the risk of Beijing widening its bans to also target Australia's exports of liquefied natural gas (LNG) to China, which account for $13 billion a year. According to an unconfirmed Bloomberg report earlier this week, at least two of China's smaller LNG importers have been verbally ordered to avoid buying new LNG cargoes from Australia.

"The current trade tensions with China create nervousness about whether or not China may target Australian LNG in the same way that it has targeted other exports," said Graeme Bethune, chief executive of energy consultancy EnergyQuest.

China's consumption of Australian LNG - a fuel used for cooking, heating, power generation, and manufacturing - has been increasing this year from 29 cargoes in February to 43 in April.

Dr. Bethune said Australian exporters had "weathered the pandemic well" and suggested a lack of gas for LNG projects - such as the declining fields supplying Santos' Darwin plant - posed a bigger threat to LNG exports than any sanctions China might impose.

"LNG exports to China continue to be remarkably stable," he said. "There do not appear to be major risks to Chinese exports, short of explicitly breaching contracts, and this sounds unlikely."

Wood Mackenzie Asia Pacific vice-chair Gavin Thompson said LNG had "so far dodged" any significant punitive action.

"But could they be next in Beijing's crosshairs if relations continue to sour?" he asked.

"An import tariff similar to the 25 percent slapped on US LNG exports in 2018 would likely be too painful for Chinese buyers and consumers, but Beijing might consider moves to deter Chinese buyers from signing new long-term contracts with Australian projects."

Mr. Thompson said such a move could be "politically expedient", allowing Beijing to highlight its willingness to widen punitive actions on Australian exports while having a minimal impact on China's future LNG supply options.

Despite such concerns, he added, there was likely to be minimal impact on existing LNG contracts. Australian volumes are considered essential to meeting China's domestic gas demand, while several Australian projects have significant Chinese equity participation.

Woodside Petroleum, Australia's biggest shipper of LNG, said it had strong relationships with its Chinese counterparts and "expects these to remain now and into the future".

"We see China as a key strategic partner for the development of Australia's - and Woodside's - resources and firmly believe such partnerships deliver value for all," a company spokeswoman said.

Despite the deepening diplomatic fallout, China is also widely considered unlikely to target exports of Australia's most lucrative export, the steel-making commodity iron ore, due to its heavy reliance on Australian supply. Chinese steel mills' record-breaking demand has been driving a stunning rally in the iron ore price this year, providing windfalls for mining companies and the federal budget.

Demand for LNG, Australia's third-largest export, has been rebounding swiftly after collapsing last year due to the COVID-19 energy crash. Producers of the fuel predict demand to remain robust as Asian nations turn to fossil fuel for a cheap, reliable, and comparatively less-emitting alternative to coal.

In the longer term, however, investors are increasingly questioning its role in a decarbonising world, concerned about its emissions footprint, and worried that new gas fields risk becoming stranded assets under the Paris agreement's goals to slow global warming.

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