The U.S.-Chinese accord on climate control may have grabbed headlines last week, but the trade pact signed between China and Australia is likely to have a much bigger impact.
In the shadows of the G20 meeting in Brisbane, Canberra inked a free trade agreement with Beijing that will see tariffs on all resources and energy products removed within two years.
By agreeing to the deal, Australia will now reap the benefits of zero tariffs on major exports like iron ore, gold, crude oil, and liquefied natural gas (LNG).
But that's not the only upside "Down Under."
This landmark agreement could also have a big impact on a tiny Australian oil stock…
A Gigantic Bet on the Biggest Export Market in the World
Of course, Australia has been moving closer to Asia for some time now.
Despite its status in the British Commonwealth and as a long-standing member of the Western security network, successive governments have stated quite openly that the future of Australia is in the Asian markets.
From Canberra's point of view, a fair trade agreement with China makes economic sense. The Asian market is Australia's biggest and geographically closest trading target.
Australia's goal is to become the main outside provider of energy, raw materials, and food to China and the rest of the Asian mainland. And as if anybody would doubt it, Canberra expanded the list by stating it wants to serve India in the same capacities.
On the energy side, where Asia in general and China in particular have pressing needs for some immediate relief, Australia now looms as a major export source. In fact, it already provides more metallurgical grade coal (the kind needed to produce steel) to Asia than any other country.
On the natural gas side, Australia's emergence as the main regional source of significant additional volumes of LNG has underpinned five huge gas projects in northwestern and western parts of the country.
The balance of all these projects, however, remains a question. Chevron Corp. (NYSE: CVX)-led Gorgon Project provides a good case in point.
I actually spent some time several years ago advising on this particular initiative, one in which a remarkable underwater production network was introduced offshore for the first time anywhere in the world.
At the time, the discovery of expanding (and massive) offshore reserves had created a potential problem for a project that was going to devote just about all of the gas for LNG exports. As it turns out, a small amount was reserved for local consumption to avoid a political roadblock and PR mess.
On the other hand, with several large LNG export projects in various stages of development in Australia, and two more in Papua New Guinea, concerns began to emerge that the competing projects would drive down the price of LNG and run the project budgets deeply into the red.
Gorgon, after all, turned out to be a significantly more expensive operation than its designers had originally intended. At the time, I had expressed some concerns about the reliability of the initial figures used in developing the projections, and I even wrote a minority report to that effect. But the end result has been even worse than I anticipated.
Meanwhile, Exxon Mobil Corp. (NYSE: XOM) had a huge LNG undertaking of its own on Papua New Guinea, and was also a minority partner in Gorgon. Chevron management often expressed the concern that if push came to shove, Exxon would sell its own LNG to Asia first, putting Gorgon into an even more untenable situation.
That was in addition to the three other LNG projects in either Australia or Papua New Guinea that were likely to add even more pressure on pricing.
Back then, the primary export market was still seen as Japan, with South Korea coming in second. Everybody recognized that China would eventually emerge as a major consumer of LNG. Yet, most estimates on when that would occur still put it 15 years or more into the future.
The worry was that projects like Gorgon would go belly up before that as all the new projects attempted to dump LNG on the Japanese market, driving down profits in the process.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.