China Tariff Threatens U.S. Liquefied Natural Gas Boom 

09/18/18 By Georgi Kantchev and Christopher M. Matthews morningstar.com

China's move to impose tariffs on U.S. liquefied natural gas imperils the ability of a burgeoning industry to export the bounty of American shale.

Retaliating against new Trump administration tariffs on $200 billion in Chinese goods, China on Tuesday issued levies on $60 billion of U.S. products, including a 10% tariff on liquefied natural gas, known as LNG.

Shares of Cheniere Energy Inc., the first U.S. company to export LNG from the U.S. Gulf Coast, rose on the news, as the tariff was lower than a 25% levy China had earlier threatened. Still, the tariff is bound to have an impact on American LNG exporters, analysts said, making them a potential early victim in the escalating trade battle between the U.S. and China.

China is the biggest source of new global LNG demand as the country steps up efforts to combat air pollution by shifting from coal-powered plants to natural gas and renewable energy sources. The U.S., which is emerging as a powerhouse in the global gas trade, was expected to mop up a big chunk of that demand.

But tariffs may now hamstring American companies as they negotiate for long-term contracts, experts said. Fewer long-term contracts could help stall a planned wave of new export terminal projects in the U.S. Numerous countries are competing with the U.S. as gas becomes a more globally traded commodity, including Australia, Qatar and Russia.

"It's a big deal for the U.S.-China gas trade," said Ira Joseph, head of gas and power analytics at S&P Global Platts. "The tariffs will push Chinese buyers to other sellers in Asia and the Middle East because the U.S. will no longer be considered a low cost option."

"The U.S. now can't come in with lowball price deals," he said.

An October U.S. LNG cargo out of Sabine Pass, La., fetches $9.04 per million British thermal units in Guandong Dapeng, China, according to S&P Global Platts Analytics. By comparison, a Qatari cargo to Guandong Dapeng goes for $10.48 per million British thermal units. A 10% tariff would make the U.S. price less competitive.

Trevor Sikorski, head of natural gas research at consultancy Energy Aspects, said that the tit-for-tat tariff moves could derail some proposed new export terminals in the U.S.

"Long-term implication is Chinese money is likely to look to countries they feel they can rely on for gas supply -- and that is good news for most of the new non-U.S. LNG projects," he said. "The biggest loser in all this is proposed U.S. LNG" infrastructure.

U.S. oil and gas producers have been eagerly awaiting new export projects, which would create new demand to eat into a glut of natural gas that has kept the U.S. benchmark price below $4 per million British thermal units for years. Natural-gas futures for October delivery were trading Tuesday at around $2.88 a million British thermal units on the New York Mercantile Exchange.

More than a dozen projects are awaiting regulatory approval in the U.S., though analysts say only a handful are likely to be greenlighted before the end of 2019. If Chinese buyers become less willing to buy U.S. LNG, it could be more difficult for U.S. LNG exporters to finance the projects, which cost billions of dollars each to build.

The tariff tussle could also cloud the prospects for long-term contracts, which are common in the industry. A number of legacy contracts are due to expire in the next few years, creating an opportunity for U.S. producers.

Cheniere signed two large supply agreements with China National Petroleum Corp. in February that run through 2043. But such long-term deals, favored by suppliers in part because they help finance expensive liquefaction facilities, may be imperiled by the new tariffs, according to analysts.

Producers like Qatar have significant volumes of unsold LNG emerging in the 2020s, meaning any wrinkle in the trade could provide an opportunity for U.S. competitors. Last week, Qatargas said it had agreed on a 22-year deal with PetroChina International Co.

"It looks highly unlikely any Chinese firm will be looking to sign up to long-term U.S. LNG contracts," Mr. Sikorski said.

Still, the fact that the tariffs were lower than China had threatened was welcomed by some investors, analysts said. Cheniere's shares rose more than 2% Tuesday, and shares of fledgling exporter Tellurian Inc. also rose. Cheniere declined to comment Tuesday.

"Over time the trade issues will work themselves out and we expect the Chinese market to continue growing," said Tellurian Chief Executive Meg Gentle.

Katie Bays, an analyst at Height Securities LLC, said the rise in Cheniere's share price reflected Chinese buyers' reliance on the spot LNG cargo market, of which U.S. supply makes up about 25%. Chinese companies had already purchased spot U.S. cargoes ahead of winter, and a steeper tariff would have been punitive to them, she said.

"Backing the tariff percentage off from 25% to 10% was a signal to the market that China was acknowledging how dependent they are on imported LNG, and imported U.S. LNG," Ms. Bays said.