As more than 3,500 delegates gathered in Barcelona for Gastech, the world’s largest natural gas conference, a continent away in Beijing, capital of the world’s largest energy consumer, the government on Sept. 18 ordered a 10 percent tariff on U.S. liquefied natural gas deliveries to China.
It’s not easy to upstage a conference that promoted more than 700 exhibitors, 350 speakers and 250 presentations, but the escalating U.S.-China trade fight made headlines that day.
“Ultimately, China has a lot of growth in its LNG demand and the U.S. is a very material source of supply, so having an impediment stopping the two from getting together … that creates an inefficiency in the market, and no one wins from that,” Steve Hill, an executive vice president in Shell’s unit that provides natural gas and LNG, as well as marketing and trading services, told S&P Global Platts an interview on the sidelines of the conference.
Few analysts said they expect any impact on global prices in the near term, but longer term many said it will make it harder for proposed U.S. LNG projects to line up customers in China and to secure financing.
“The bigger implication will be on the launching of new projects,” Hill said.
The longer the trade dispute lasts, the less likely that U.S. projects will find financial backers, said Charlie Riedl, executive director of the Center for Liquefied Natural Gas, a U.S. industry group, speaking with Reuters from Barcelona.
China’s decision to impose tariffs, which took effect Sept. 24, means LNG is no longer an “innocent bystander” in the trade fight between the two countries, Riedl told S&P Global Platts.
“There is a realistic possibility getting to FID (final investment decision) will be difficult,” he said of the multiple U.S. export projects in various stages of planning, design and permitting. “While we would like to see this resolved quickly, I don’t see that happening right now.”
But what may be bad for U.S. gas producers and project developers could be good for other LNG suppliers.
“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,” Trevor Sikorski, head of gas research at consultancy Energy Aspects, told the Wall Street Journal.
“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,” said Ira Joseph, head of gas and power analytics at S&P Global Platts.
An October cargo out of Cheniere Energy’s terminal in Sabine Pass, La., fetches $9.04 per million Btu in Guandong Dapeng, China, reported S&P Global Platts Analytics. By comparison, a Qatari cargo to the same port goes for $10.48. A 10 percent tariff would make the U.S. gas less competitive.
Speaking at Gastech before China’s announcement, Saad Sherida Al-Kaabi, CEO of Qatar Petroleum, the biggest LNG exporter in the world, said the tariff might help his company but could hurt the industry.
“I don’t think that long-term it’s good for the market to have politics and to have taxation on a very important basic requirement for humanity, which is energy,” he said.
China ordered the tariff on LNG and a list of more than 5,000 other U.S. products in retaliation for President Donald Trump’s decision a day earlier to impose a 10 percent tariff on $200 billion a year worth of Chinese products imported by the United States, climbing to 25 percent by the end of the year.
The 10 percent tariff on U.S. LNG could have been worse — China originally had threatened a 25 percent levy.
China is the world’s second-largest LNG buyer and expected to eventually overtake Japan for the No. 1 spot. The nation of almost 1.5 billion people is looking to use more gas and less coal to clean up its notoriously polluted air. The United States, the world’s largest gas producer, has been looking to China as a prime market for export sales.
“In the 12 months up until June 2018, China was the second-largest buyer of U.S. LNG, accounting for approximately three million tonnes per year,” Wood Mackenzie research director Giles Farrer said in a note following the tariff order.
“There has likely been some longstanding damage done to the perception of reliability of U.S. LNG supply in the eyes of Chinese buyers who will shape the next wave of global LNG projects,” Saul Kavonic, Credit Suisse Group’s director of Asia energy research, was quoted by Bloomberg the day after the news.
About 15 U.S. LNG export projects are targeting a final investment decision this year and next.
“It is hard to see any of these hopeful projects getting another Chinese buyer signed up for long-term volumes,” Sikorski told Bloomberg.
Hours before the tariff news, Laszlo Varro, chief economist at the Paris-based International Energy Agency, told CNBC news at Gastech that a lack of export capacity could force curtailment in the U.S. shale gas boom.
“Without additional investments into American liquefied natural gas projects, the American gas industry will have to keep gas in the ground, which would be … economically quite disruptive,” Varro said.
A week before Gastech, a senior U.S. Department of Energy official told a Senate committee: “Every molecule of energy that the United States exports is exporting freedom to the world.”
Putting that statement in the context of the U.S.-China trade war, a columnist for the London-based Financial Times quoted Nikos Tsafos, a senior fellow at the Center for Strategic and International Studies in Washington, D.C.: “This idea that the U.S. is exporting freedom has been somewhat premised on the notion that U.S. LNG is somewhat better, or less risky, than other gas. I think that has been a very difficult thing to say over the past 18 months.”
The world has more than enough LNG, the columnist noted, giving China the freedom to choose where to buy gas.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.