While domestic liquefied natural gas (LNG) developers touted increased exports as a means of improving the country’s trade balance with China, industry experts told members of the U.S. Senate they have major concerns that business dealings with Beijing could undermine U.S. economic security.
Speaking at a hearing last week to examine the increasing role of U.S. LNG, Melanie Hart, director of the China Program at the Center for American Progress, said arguments calling for the United States to export large amounts of LNG to China reflect deep misunderstandings about the global LNG market. They also reflect a deep misunderstanding about China’s own national interests and how Beijing seeks to position China in global energy markets.
“There is no strong commercial business case for exporting large quantities of U.S. LNG to China,” Hart said last Thursday at the hearing chaired by Sen. Lisa Murkowski (R-Alaska).
Even as China works to replace high-emission coal with cleaner-burning fuels like natural gas, it already receives imports from more than 25 other nations, most of which are cheaper than the shipments it receives from the United States, according to Hart. When transporting natural gas to Shanghai, tankers from the Gulf Coast travel 10 days longer than tankers from Qatar and 15 days longer than tankers from western Australia. As a result, shipping costs from the Gulf Coast to China are twice what they are from Qatar and almost three times the costs from Australia.
“If Chinese representatives offer to pay a price premium for U.S. natural gas, Americans should pay close attention to what Beijing expects to receive in return,” Hart said.
Nevertheless, U.S. LNG developers see Asia -- and China in particular as its LNG imports are seen growing fastest -- as an opportunity to dramatically improve the U.S. trade balance. Sempra Energy’s Dennis Arriola, executive vice president, said recent data from the Commerce Department indicated that the deficit to China rose 12.2% in May to $30.2 billion.
“Since 10 countries in Asia account for over 80% of our trade deficit, selling them LNG could be a win-win outcome,” Arriola said. “Exporting LNG to China alone could be a game changer for our trade deficit.”
Sempra is developing LNG export facilities that would be capable of exporting 45 million metric tons/year of LNG around the world. The first of those projects, Cameron LNG, achieved first production from the first train in May, with President Trump traveling to the Hackberry, LA, facility to commemorate the event. The first commissioned cargo set sail later that month.
Beijing has demonstrated an interest in making long-term investments in Alaska. In November 2017, Trump and Chinese President Xi Jinping oversaw the signing of a preliminary agreement between Alaska and three Chinese state-owned enterprises -- China Petrochemical Corp., China Investment Corp. (CIP) and the Bank of China -- in which the Chinese firms would bankroll Alaskan electricity generation, underground natural gas liquids storage and chemical manufacturing projects in exchange for guaranteed access to 75% of the gas produced over the duration of the project.
CIP also signed a an $83.7 billion memorandum of understanding with officials from West Virginia to develop shale gas and chemical manufacturing projects in the Mountain State.
But those deals are a concern for two reasons, according to Hart.
“First, even if Beijing’s intentions are pure, long-term investments, they are out of step with current market trends. Global LNG markets are shifting from oil-linked to hub-based pricing, and that is making long-term contracts less attractive,” Hart said.
Natural gas infrastructure is also evolving, Hart added. Technical innovations are making it possible to deploy cheaper and more flexible floating import and export terminals, which reduces the need for massive fixed-infrastructure investments.
“Second, the United States cannot assume Beijing’s intentions are pure,” Hart said. “Chinese state-owned enterprises, including oil majors, answer to the Chinese Communist Party. Those firms are tools of the state and behave accordingly.”
If those firms obtain massive shares in U.S. natural resources -- large enough to potentially control how those resources are used and effectively bankroll the state and local economies in which they operate -- that raises important questions about how that might affect U.S. national security, according to Hart. “If those deals move forward, the Chinese Communist Party will have tremendous leverage over local economies in two great American states.”
Nikos Tsafos, a senior fellow at the Center for Strategic and International Studies’ Energy and National Security Program, agreed that the U.S.-China deal in Alaska put a disproportionate amount of risk on the state. A successful model has to be one in which each player has a fair share of risk, he said.
Furthermore, with the United States’ emerging role as a leader in LNG supply comes an opportunity to shape the conversation for a shared understanding of energy security, of what information needs to be collected and assessed and on how energy security might be best pursued in a collective, multilateral framework, he said.
“Creating this infrastructure is not about copying and pasting what works for oil. It will be different. But this conversation is still nascent, and the United States can help elevate it,” Tsafos said.
With the LNG market becoming more competitive and somewhat more politicized, it is in this “ultra-competitive market that existing U.S. LNG projects will need to survive and new projects find a way to succeed,” according to Tsafos. As such, the United States should appreciate the changes in the global gas market and understand how it is interacting or accelerating those changes.
And, it should do so “without resorting to broad strokes or the caricatures that often dominate the public discourse, but to pay due attention to complexity, nuance and circumstance,” Tsafos said.