U.S. LNG exporters face headwinds due to trade war with China

Scott DiSavino  Business News  reuters.com  May 16, 2019 / 1:33 PM / Updated 20 hours ago 

The U.S. trade war with China has dozens of developers of liquefied natural gas export terminals scrambling to find other buyers, now that the fastest-growing market for the fuel is out of reach.

U.S. shipments of LNG to China hit a record in 2017 but have already dropped to next-to-nothing so far in 2019. Then on Monday, China said it would raise tariffs on U.S. LNG imports to 25% on June 1 from the current rate of 10%, retaliating against Washington’s increase in tariffs on $200 billion of Chinese goods last week.

The tariffs are discouraging Chinese customers from signing long-term deals with U.S. suppliers, analysts warned, which has made banks and investors less willing to finance projects under development. Natural gas use is growing fast among power generators worldwide as countries like China seek to wean themselves off dirtier coal, although gas is still a small part of the overall fuel mix.

World demand for natural gas is expected to grow from 340 billion cubic feet per day (bcfd) in 2015 to 485 bcfd by 2040, according to the U.S. Energy Information Administration (EIA), with China accounting for more than a quarter of that growth.

Six U.S. LNG projects have units currently under construction. More than two dozen others are still seeking customers to satisfy potential investors before they can break ground. These projects are less likely to come to fruition if tariffs remain in place for an extended period.

Chinese buyers have started signing deals with other suppliers. This complicates the search for customers for U.S. developers hoping to build the next generation of LNG export plants.

“There will be a reluctance to (Chinese gas users) signing new deals with U.S. projects as long as this trade war persists,” said Sindre Knutsson, senior analyst at Rystad Energy’s gas markets team.

Major U.S. suppliers disagreed. They said low U.S. gas prices will attract enough customers to justify funding new export projects, regardless of what China does.

“The very low cost of American LNG will create its own demand,” said Charif Souki, chairman of Tellurian Inc, which expects to make a final decision in coming months to build its Driftwood LNG export project in Louisiana.

Most LNG projects are financed through long-term contracts signed well before construction begins. Rystad, a Norway-based independent energy research consultancy, expects China to be one of the biggest sponsors of new LNG projects in coming years.

Rystad forecasts Chinese LNG demand will reach 95 million tonnes per annum (MTPA) in 2025, up from 53 MTPA in 2018, which would make it the world’s biggest LNG importer, overtaking Japan.

U.S. LNG exports are expected to nearly quadruple to 86 MTPA by 2025, equivalent to about 11.4 bcfd of natural gas, according to EIA projections. That is enough for about 55 million U.S. homes every day.

Before the U.S.-China trade war ignited in July 2018, China was the third biggest buyer of U.S. LNG. This year, China is not even in the top 15, with only two U.S. shipments reaching the country.

“Chinese investment in U.S. LNG export projects will remain at a standstill, in our view, with Chinese offtakers likely waiting on a trade deal before signing any deals with U.S. counterparties,” analysts at Barclays said.

They noted that China National Petroleum Corp (CNPC) and China National Offshore Oil Corp’s (CNOOC) recent deal for an equity stake in Russia’s Arctic LNG 2 project signals China could look elsewhere for long-term supply until trade tensions thaw.

Jack Fusco, chief executive officer at Cheniere Energy Inc, however, told analysts last week that while the tariffs add some costs to Chinese customers, they are not expected to have a material impact on the company “either today or going forward.”

Fusco said trade tensions were not having an impact on the company’s plan in coming months to make a final investment decision to build a sixth liquefaction train at its Sabine Pass LNG export plant in Louisiana, one of two it operates in the United States.

Analysts, however, said Cheniere was likely waiting for the resolution of the trade dispute before completing a 20-year deal to sell LNG to China Petroleum & Chemical Corp, known as Sinopec.

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I would like to think that our "current unpleasantness" with China won't last long, but I'm not sure that's a good assumption.  China has been an unfair trading partner for so many years that turning that around won't be quick or easy.  I work in a field where the US Government is (finally) making efforts to stem the flow of US-funded technology and IP to China.  Currently, the Chinese scoop up US-developed technology so they can manufacture goods based on US IP and sell the products to ... you guessed it, US (and you can read that as United States or "us" as in US consumers).  I am generally inclined to oppose tariffs.  But, the situation with China is quite alarming.

The trade war impact on LNG will hit my personal pocketbook, but I'm willing to support the US government in trying to do something about China's trade practices.  Thursday or Friday, I heard an interview with Sen. John Kennedy on cable news about the China situation.  I agree with his position.  I do worry about the impact on US farmers - a much larger impact than on me as a royalty owner in the Haynesville Shale. But the China practices must be addressed.

Steve P, did you ever take any history or economics courses at LSU? Do you know about the trade war of the 1920s and the imposed tariffs, post WWI, which led up to the Stock Market Crash of 1929 and the subsequent Great Depression?  

The cause is just.  The strategy is childish.


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