LNG exports slammed amid US-China trade battle
China’s increased tariff on U.S. liquefied natural gas is making it harder for project developers to negotiate sales into Asia’s largest economy, though it’s uncertain whether the trade fight will inflict long-term damage on the country’s growing gas export industry.
“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,” analysts at Barclays said just a couple of days after China announced it would boost its tariff on U.S. LNG to 25 percent from 10 percent on June 1.
“This is going in the wrong direction,” said Charles Riedl, of the industry group Center for Liquefied Natural Gas in Washington, D.C. “Increasing tariffs … could have real long-term impacts on the pace of U.S. LNG export project development.”
U.S. gas exports to China went into a steep decline after the Chinese government retaliated with a 10 percent tariff in September 2018, following on President Donald Trump’s decision to impose tariffs on Chinese goods. After sending an average of almost three cargoes per month to China in 2017 and the first half of 2018, U.S. LNG deliveries fell to one per month in the second half of 2018 and only three ships so far in the first five months of 2019.
“I expect they will have a hard time landing a tanker carrying U.S. LNG in China,” Jack Weixel, senior director at IHS Markit’s PointLogic analytics arm, was quoted by Reuters the day after China ordered the 25 percent tariff.
As if it wasn’t already hard enough. Low spot-market prices in Asia of around $5 per million Btu “already killed most of the commercial reasoning for U.S. sales to China,” said Ira Joseph, head of global gas and power analytics at S&P Global Platts. “The tariff is the knockout blow.”
Weak demand and new supplies coming online this year have brought down prices.
Feed gas flowed into six U.S. LNG terminals on May 15, a little more than three years after the first Gulf Coast terminal started operations in Sabine Pass, La.
At $5, a cargo of U.S. LNG falls about $2 or $3 below recovering its full costs. But carriers still load up at U.S. terminals. The liquefaction fee, generally around $2.50 to $3 per million Btu, is a fixed cost that contracted offtakers must pay regardless of market prices — even if they don’t want to take the gas. They might as well sell the LNG and get what they can.
And some of the LNG is delivered at higher prices under long-term sales-and-purchase agreements.
Not for lack of trying, but U.S. project developers have not had a lot of success in getting Chinese buyers to sign long-term contracts — even before the dueling tariffs.
Spot-market sales and third-party deliveries have been the main source of U.S. LNG supplies to China, though project developers would prefer long-term contracts to lock in the revenue stream needed to finance new capacity. That’s especially true for the maybe 10 or so additional LNG terminals proposed along the U.S. Gulf Coast, at various stages of permitting and trying to line up customers and investors.
“Most of these projects need to secure long-term contracts in order to get financing,” said Sindre Knutsson, senior analyst on the gas market team at Rystad Energy, a Norwegian-based energy consultancy.
“China will be one of the biggest contributors in sponsoring new LNG projects over the coming years, and there will be reluctance to signing new deals with U.S. projects as long as this trade war persists,” Knutsson said.
Long-term contracts are essential for most project developers, which want to show investors and lenders they can cover debt and make money. “Such 10- to 20-year contracts require stability of terms for both sides,” said Edward Chow, of the Center for Strategic and International Studies in Washington, D.C.
Even worse for U.S. developers, Knutsson said, “China’s decision to impose tariffs on U.S. LNG will make projects outside of the U.S. more attractive.”
Just in the past few weeks, China National Offshore Oil Corp., or CNOOC, signed a long-term offtake deal for the Anadarko-led Mozambique LNG project, while CNOOC and China National Petroleum Corp. — two of the big three national oil companies — each took a 10 percent equity stake in Russia’s next multibillion-dollar gas project, Arctic LNG-2.
Deliveries from Arctic LNG-2 are four years away, but a more immediate supply of Russian gas to China is scheduled to start flowing in December through the “Power of Siberia” pipeline. At full capacity in 2023, the line should be able to deliver 3.6 billion cubic feet of gas per day, equal to almost 15 percent of the country’s total gas consumption in 2017.
In the first quarter of this year, China’s gas imports broke down as about 60 percent from LNG deliveries and 40 percent by pipeline, mostly from Central Asia.
“The longer the tariff war continues, the more the United States will hand advantages to new rival producers in countries such as Russia and Mozambique, and help make the business case for existing major producers such as Qatar and Australia,” Reuters energy columnist Clyde Russell wrote the day China announced the higher tariff.
“Projects that are under development that cannot sell LNG to China are at a competitive disadvantage — there is no doubt about that,” Nikos Tsafos, a senior fellow at the Center for Strategic and International Studies wrote May 14.
But that statement comes with asterisks, Tsafos explained. “For one, Chinese buyers have never been major customers for U.S. LNG — the tariffs merely solidify an unfavorable reality.” Regardless of the trade fight and lack of Chinese offtakers, success for U.S. LNG project developers “still depends on finding a diverse customer base.”
And there is a longer-lasting concern than any temporary tariff fight, he said. “It signals the extent to which energy relations and trade are becoming politicized … undermining confidence in an open market for energy and LNG.”
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the incoming Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.