China, world’s biggest gas buyer, has threatened US supplies; US LNG may be included in next round of retaliatory duties
An LNG carrier sits docked at the Cheniere Energy terminal in this aerial photograph taken over Sabine Pass, Texas (file). China may target American liquefied natural gas in retaliation for a fresh round of duties announced on Monday by the US. While the Asian nation last month said it was considering a 25% tariff on the fuel, it hadn’t yet provided any details when it vowed on Tuesday to take new action.
US gas is under threat as a trade war with China escalates.
China may target American liquefied natural gas in retaliation for a fresh round of duties announced on Monday by the US. While the Asian nation last month said it was considering a 25% tariff on the fuel, it hadn’t yet provided any details when it vowed on Tuesday to take new action.
The move would be a setback for a burgeoning energy relationship that was on track to be a boon for both economies. The move would also add new pressure on the US LNG industry, which is competing with Russia, Australia and Qatar for market share in China, the world’s biggest gas buyer.
Just last year, US officials were courting Chinese companies to invest in new export projects.
The tariffs would signal how much pain Presidents Xi Jinping and Donald Trump are willing to endure not to back down from a trade fight. Trump risks stifling the US gas export industry, which is seeking an estimated $139bn to fund more than a dozen projects, while Xi threatens to raise the cost of his drive to eliminate smog by burning less coal.
“Chinese companies will have an aversion to investing in US LNG projects in the short term” if tariffs are imposed, said Saul Kavonic, Credit Suisse Group AG’s director of Asia energy research. “Australia and Qatar’s LNG sectors will benefit from being seen as a lower risk source of supply by customers in the world’s fastest growing LNG market, at least over the near term.”
China’s push to use more natural gas is driving global demand growth, with LNG imports jumping 47% in the first seven months of the year. Though it’s the third-largest buyer of US cargoes, American supply made up a little less than 6% of purchases over that period, according to Sanford C Bernstein & Co. If US companies can seize 20% of the market by 2030, it could lower the trade deficit with China by $50bn, Bernstein estimates.
Higher oil prices and a surge in LNG demand have reignited interest in export ventures, with about 15 US projects targeting final investment decision this year and next, the most of any nation, according to Bloomberg NEF. Projects have been seeking investments or off-take agreements from China, which earlier this year topped Japan as the world’s biggest gas importer.
“It is hard to see any of these hopeful projects getting another Chinese buyer signed up for long-term volumes” if China slaps tariffs on US gas, Trevor Sikorski, an analyst at Energy Aspects Ltd, said by e-mail. “Given China is a huge part of global LNG demand growth, that is a big headwind for these new projects.”
Liquefied Natural Gas Ltd, which is yet to make a final investment decision of the $4.35bn Magnolia LNG project in Louisiana, expects Chinese buyers will wait for uncertainty on tariffs to be removed before signing contracts, chief executive officer Greg Vesey said on Monday at an industry conference in Barcelona. Exporting nations such as Australia and Qatar could benefit from the trade tensions, according to Xizhou Zhou, an analyst at IHS Markit.
“You have two important parties in the LNG market – one is a very important large buyer, one is an important large supplier – less likely to negotiate with each other,” he said by phone. “So Qatar and Australia will have less competition when it comes to the Chinese market for long-term contracts.”
The GasLog Greece, which left Cheniere Energy Inc’s liquefied natural gas export terminal in Louisiana on August 15 en route to China, changed its destination mid-journey to South Korea. It was one of at least two US LNG shipments heading for China during the past month. The other ship, Rioja Knutsen, arrived September 3 at Tianjin.
More than a month ago, state-owned PetroChina Co contemplated temporarily halting purchases of US gas and increasing buying from other nations, while ENN Group, a private gas distributor and burgeoning LNG importer, decided not to buy any supplies from the US this winter, Bloomberg reported last month.
Most LNG cargoes are sold at a price linked to oil, whereas US supplies are often priced off domestic gas prices, which have declined about 4% this year. China’s decision comes as US gas has become cheaper than oil-linked cargoes and amid the prospect of crude continuing to rise over the next few years. LNG spot prices in Northeast Asia this year have averaged the highest since 2014, at around $9.70 per million British thermal units. Prices last year surged on the back of China’s soaring consumption.
That’s why the tariffs are an especially cruel blow for companies backing prospective US liquefied natural gas export terminals, including Tellurian Inc, Liquefied Natural Gas Ltd and Pembina Pipeline Corp. A 25% levy would lift US LNG back above oil-linked costs.
On the other hand, that’s good news for energy giants that have LNG prospects outside the US. That includes Irving, Texas-based Exxon Mobil Corp, which has ties to projects in Papua New Guinea and Mozambique, and Royal Dutch Shell Plc, which is aiming to build a plant in western Canada, operates a project in Australia and has one of the world’s biggest LNG trading portfolios.
Exxon also signed a preliminary deal earlier this month to participate in a potential LNG import terminal in southern China, as well as supply it with gas. Separately, PetroChina inked a deal with Qatar to purchase 3.4mn tonnes of LNG annually, the Chinese company’s biggest supply deal yet.
Merchant trading houses like Vitol SA, Trafigura Group Pte Ltd and Gunvor Group Ltd, may also be able to benefit by, for example, routing US LNG to buyers including Japan and South Korea while selling Malaysian or Australian fuel meant for those markets to China instead, all with a little added mark-up for themselves.