Editor’s Note: This article was initially published on September 19, 2018.
New York
UJ Business
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The United States possesses a surplus of natural gas that the pollution-laden China desperately needs to transition away from coal.
With China’s immense demand in sight, American energy companies like Cheniere Energy and ExxonMobil (XOM) are hurrying to construct over 24 costly facilities for exporting liquefied natural gas, which is natural gas that has been super-cooled for shipping.
During President Donald Trump’s visit to Beijing last fall, China even pledged to invest as much as $43 billion into an LNG project in Alaska.
However, the once-promising synergy between a willing buyer and a well-supplied seller now appears uncertain. As part of the escalating trade conflict, China announced on Tuesday that it would impose a 10% tariff on $60 billion worth of U.S. products, including LNG.
The ongoing trade tensions may hinder financing for the upcoming wave of LNG export facilities, making it harder for them to get off the ground.
“It’s definitely concerning. The possibility of delays for some projects is quite real,” stated Charlie Riedl, executive director of the Center for Liquefied Natural Gas, a trade association for companies like Exxon and Chevron (CVX).
The shale revolution led to an oversupply of natural gas within the United States. To mitigate this surplus, the U.S. started exporting LNG in 2016 when Cheniere (LNG) opened the Sabine Pass terminal in Louisiana. Earlier this year, Dominion Energy (D) launched the Cove Point terminal in Maryland, the nation’s second export facility.
China remains a significant factor in the equation, with its appetite for LNG rapidly increasing. It is on the verge of surpassing Japan as the leading global buyer of LNG.
This substantial demand is a key reason the U.S. aims to quadruple its export capacity by developing at least 25 new facilities. LNG is central to Trump’s energy dominance strategy.
In the year ending June 2018, China ranked as the second-largest purchaser of U.S. LNG, based on data from energy consulting firm Wood Mackenzie. The largest seller was Shell, the U.S. arm of Royal Dutch Shell (RDSA).
Nevertheless, recent months have seen China reduce its purchases of U.S. LNG amidst rising trade tensions, as indicated by ClipperData. Beijing is increasingly looking to LNG powerhouses such as Qatar, Australia, and Russia.
“China has successfully found alternate sellers closer to home,” remarked Matt Smith, director of commodity research at ClipperData.
The tariffs are anticipated to render U.S. LNG uncompetitive in the Chinese market, according to S&P Global Platts.
“Other suppliers worldwide would be eager to sell to China, and they won’t face that 10% tariff,” noted Riedl.
Kyle Isakower, vice president for economic policy at the American Petroleum Institute, expressed in a statement that the trade situation “undermines growth in the U.S. energy sector and contradicts the administration’s declared aim of ‘energy dominance.’”
The silver lining is that China had previously threatened a heftier tariff – 25% – on U.S. LNG. Cheniere’s stock rose by 2% on Tuesday in light of the lower-than-expected rate.
Nevertheless, analysts do not forecast a drastic impact on overall U.S. LNG exports in the near term. There are plenty of alternative buyers, including Japan, South Korea, Taiwan, and markets in Latin America. Furthermore, the U.S. has encouraged Europe to reduce its reliance on Russian natural gas.
“If China reduces its purchases, other markets will absorb that supply,” stated Pavel Molchanov, an energy analyst at Raymond James. “Revenue remains revenue, no matter who the buyer is, be it from China, Europe, or Latin America.”
The significant repercussions of the U.S.-China trade conflict may be felt in the upcoming wave of LNG projects currently being planned.
Given the massive investment required to establish each facility, securing finances largely depends on signing a long-term buyer for contracts. Until now, that buyer had typically been China.
For instance, in May, Cheniere announced plans to expand its Corpus Christi export terminal in Texas. This expansion was partially based on a contract with PetroChina (PTR).
Cheniere has not replied to requests for comments regarding the tariffs’ impact from China.
In August, Cheniere’s CEO Jack Fusco informed analysts that the anticipated tariffs from China might slow negotiations with Chinese counterparts concerning future expansion.
Nonetheless, Fusco assured that the tariffs would not affect existing agreements and highlighted the benefits of the U.S.-China energy relationship, which has resulted in the creation of thousands of American jobs, both direct and indirect.
“China represents a crucial market for growth for Cheniere,” Fusco remarked. “We anticipate selling substantial quantities of LNG to China in the long run.”
