An escalating trade war between the United States and China will put U.S. liquefied natural gas (LNG) exporters at a disadvantage and threatens to stall not-yet-sanctioned projects, according to analysts.
The White House last Friday increased tariffs to 25% from 10% on $200 billion of Chinese goods. China then retaliatedwith the same hike on $60 billion of U.S. imports, including LNG.
The 10% tariff on U.S. LNG imports that was implemented last fall appears to have already had an impact on Chinese imports of the super-chilled fuel. Data from the Department of Energy showed domestic gas exports to China in January were down 75% year/year, while February exports were down 49%.
Only four cargoes have been delivered to China from the United States since the tariffs have been in effect, compared to 35 cargoes in the prior September-April period, according to Wood Mackenzie. This is despite more than 30% growth in both Chinese imports (32%) and U.S. exports (38%) over the same time periods.
While the trade dispute between the No. 1 and No. 2 global economies has had an impact on Chinese imports, Beijing began importing LNG in earnest during a record hot summer in anticipation of a cold winter that never materialized. Nevertheless, the tariff increase may reduce flows to China further, Wood Mackenzie said.
“The last long-term contract signed by a Chinese offtaker and U.S. seller was in February 2018, before the trade war began,” when PetroChina International Co. Ltd. signed a 25-year sales and purchase agreement (SPA) with Cheniere Energy Inc., according to Wood Mackenzie.
Since then, Chinese buyers have announced both SPAs and heads of agreements from the rest of the world, including projects in Mozambique and Canada, and with portfolio sellers that include Qatargas and Petronas.
“An ongoing trade war between the U.S. and China will continue to create hesitancy for Chinese buyers to sign up for new long-term volumes,” Wood Mackenzie said.
Cheniere management has indicated that plans for a sixth train at the Sabine Pass, LA, export terminal and an expansion of its Corpus Christi, TX, project can move forward“with or without China.” However, developers that have yet to reach final investment decisions (FID) on a slew of second-wave projects may have a harder time moving forward.
“Most of these projects need to secure long-term contracts in order to get financing for their development,” said Rystad Energy’s Sindre Knutsson, senior analyst. The firm expects China to be one of the biggest contributors in sponsoring new LNG projects over the coming years, “and there will be a reluctance to signing new deals with U.S. projects as long as this trade war persists.”
Rystad is forecasting that Chinese LNG demand will reach 95 million metric tons/year (mmty) in 2025 from 53 mmty in 2018, which would make China the world’s largest LNG importer.
The United States, on the other hand, is the fastest-growing gas exporter, with Rystad predicting that U.S. export volumes will nearly quadruple over the coming years, reaching 84 mmty by 2025 based on currently sanctioned projects.
So-called oil-indexed gas contracts are more common in countries that include Australia, Qatar, Mozambique and Papua New Guinea versus the United States, where indexing to the Henry Hub price is more prevalent.
“This means that non-U.S. projects are more competitive in terms of breakeven price (delivered), and that China therefore could have greater bargaining power when negotiating new contracts,” Knutsson said.
U.S. regulators recently gave the green light to several proposed projects, including Port Arthur LNG and Driftwood LNG. For the 13.5 mmty Port Arthur, TX, facility, the project needs to sign up more offtakers before it moves to FID, having sold only 2 mmty under a long-term SPA with Poland’s PGNiG, according to Energy Aspects.
Tellurian Inc.’s Driftwood export project, which received FERC approval last month, “also needs to land some binding SPAs before an FID becomes possible,” Energy Aspects said. Tellurian management has indicated its timeline for reaching FID could slip from a previous June target.
Meanwhile, Venture Global LNG earlier this week received its final environmental impact statement from the Federal Energy Regulatory Commission for the Plaquemines LNG export project, which management has said puts the project on track for FID, construction start-up in late 2019 and full commercial operations in 2023.
“Such a timescale does feel ambitious and, again, the project needs to finalize more long-term SPAs before an FID is likely to be forthcoming, with only around 1 mmty of that project covered by an offtake agreement,” Energy Aspects said.
There are a couple of silver linings for U.S. LNG operators, analysts added. For one, Chinese companies have not jumped into the deep end of investing in long-term contracts with U.S. counterparties, which may insulate U.S. producers in the short term, according to Morningstar Commodities Research. In addition, demand for LNG, though growing, still represents a small part of the overall U.S. gas market. At roughly 4.0 Bcf/d of exports, LNG represents about 5% of demand.
“It is clear that any growth story for U.S. LNG cannot be written without China,” said Morningstar’s Matthew Hong, director of research for power and gas. “What is uncertain, is whether the current environment is the beginning of a long-term trend or a blip in the timeline in what would otherwise be a bullish story for U.S. natural gas.”
Meanwhile, Wood Mackenzie analysts noted that while the tariff increase may hinder flows to China further, “the absolute value of the tariff is partially offset by falling spot prices in Asia -- from over $10/MMBtu when initially introduced to closer to $5.50/MMBtu today.”