LNG tariffs could be self-defeating move for China

  • President Donald Trump and China's President Xi Jinping attend at a state dinner at the Great Hall of the People in Beijing, China, on Nov. 9, 2017. Earlier that day Gov. Bill Walker signed a joint development agreement with three state-owned Chinese corporations to explore development of the Alaska LNG Project with China potentially financing 75 percent of the project in exchange for purchasing 75 percent of the production capacity. (Pool Photo/Thomas Peter/AP)

In the short term, China may have to pay more for liquefied natural gas imports though longer term it has several other supply options if it goes ahead with its threatened 25 percent tariff on U.S. LNG, analysts reported in the week after China’s announcement.

There could be a lot more LNG coming from expansions in Qatar, Australia and Papua New Guinea over the next several years, with new projects moving toward final investment decisions in Mozambique and Canada’s West Coast. And there is the scheduled late-2019 start-up of the 2,500-mile Power of Siberia pipeline to move Russian gas to China.

The line’s capacity of 3 billion cubic feet of gas per day could fulfil more than 15 percent of China’s import demand in 2023, based on the International Energy Agency’s 2018 forecast report. Neither Gazprom nor China has announced pricing terms for the gas.

As a near-term reaction if the tariff takes effect, U.S. gas would become uneconomical in China and traders would shift their cargoes to send U.S. LNG to other buyers like Japan and South Korea, while redirecting non-U.S. gas to China, Trevor Sikorski, with Energy Aspects in London, told Bloomberg. China would probably end up paying about 10 percent more for spot cargoes after the swaps, he said.

Spot-market pricing fluctuates much more than contract prices linked to oil or other fixed indices.

The tariff would not reduce overall U.S. LNG export volumes, but would reorient trade flows, pushing more U.S. gas to Europe and other markets, while Mideast and African cargoes would be pushed to Asia, driving up prices, Neil Beveridge, an analyst with Sanford C. Bernstein &Co., was quoted in the Australian Financial Review.

A 25 percent tariff could hit the next wave of U.S. projects with a “real impact on prospective deals … it certainly adds to the risk of delay,” David Lang, global head of LNG at law firm Baker &McKenzie, told Bloomberg. “This is a pretty dramatic move.”

“At least in the short term any Chinese buyer looking for long-term supply would have to drag their feet on signing a U.S. contract,” Jason Feer, head of business intelligence at Poten &Partners in Houston, told Bloomberg.

It could hit U.S. developers seeking long-term contracts to underpin financing of their export projects, Giles Farrer, research director for global gas and LNG supply for research firm Wood Mackenzie, was quoted by the Houston Chronicle.

As much as the threatened tariff may hurt U.S. project developers, there will be a price to end-users in China.

“This action is more likely to hurt Chinese buyers than U.S. exporters,” Katie Bays, an analyst with Height Securities in Washington, D.C., was quoted by Bloomberg.

China said it would impose the tariff if President Donald Trump follows through with his Aug. 2 threat of more duties on goods imported from China.

“So long as the U.S. places no barriers on exports of its own, such barriers … by importing countries would be potentially self-defeating,” CNBC quoted Citigroup analysts. “This coming winter for example, China is likely to be short on both LNG and soybeans, two U.S. commodities on which it has placed barriers.”

However, a tariff war could cast doubt on the dependability of U.S. gas supplies, Citigroup added.

China’s gas consumption is rising dramatically as the country — as a matter of government policy — tries to clean its air of coal pollution by burning more gas.

Warren Patterson, commodity strategist for ING Bank, said he was “quite surprised” to see LNG show up on China’s list.

“Given the transition we are seeing in China, with a move away from coal toward natural gas, I would have thought that the government would have wanted to ensure adequate supply,” Patterson told Bloomberg.

The importance of U.S. gas to help meet that demand may mean the threatened tariffs don’t last, said Vivek Chandra, chief executive of aspiring exporter Texas LNG, which is working to develop a 2-million-tonne-per-year terminal in Brownsville, Texas.

“Imports of U.S. LNG and oil into China represent one of the best ways for both countries to balance their trade balances,” Chandra told the Australian Financial Review. “Thus, we do not expect these tariffs to prevail in the long term.”

Beveridge, with Sanford C. Bernstein &Co., shared a similar view with Reuters: “LNG is one of the most obvious ways to lower a trade deficit between the U.S. and China, and if there is a trade deal to be done LNG will be involved. … The latest rhetoric smacks of a negotiation being played out in a very public way.”

But politics could make it harder. Hugo Brennan, senior Asia analyst at consultancy Verisk Maplecroft, told CNBC: “Geopolitical dynamics will undermine American exporters’ bid to become major gas suppliers to China.”

There are other suppliers “eager to fill the gap,” Charlie Riedl of the Center for LNG, which represents the U.S. industry, told the London Financial Times. “This … would have very real effects on the U.S. LNG industry.”

China could turn to Australia and Qatar, the world’s two biggest exporters, to supply its needs, ING’s Patterson said.

Australia is nearing the end of a massive build-up of LNG capacity, with its sixth and seventh new export projects to come online this year, providing several opportunities for lower-cost expansions of existing liquefaction plants.

The partners in Papua New Guinea’s 4-year-old LNG project are looking to make an investment decision on a major expansion next year. In Mozambique, Anadarko, the leader of the largest of several gas projects, has targeted the first half of next year for its investment decision.

The world’s largest LNG producer, Qatar, already has decided to expand its 77 million tonnes of annual capacity by 30 percent, with a 2023-2024 start-up.

The $40 billion (Canadian) Shell-LNG project in Kitimat, British Columbia, is scheduled for a final investment decision later this year.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.

08/14/2018 - 3:43pm