Beijing’s move to exclude US LNG from list of additional tariffs to be levied on U.S. imports clearly shows that natural gas is seen as an essential good, and in the event of an escalation Wood Mackenzie expects LNG to remain outside the bounds of any additional tariffs.
“Tariffs on US LNG would increase costs and potentially limit availability of LNG. CNPC recently signed two long-term deals with Cheniere, one of which starts in 2018. For flexible US volumes, the introduction of tariffs would have posed a significant challenge for Chinese buyers as they seek to meet surging demand. It would also have created logistical headaches for suppliers to optimise their portfolios to ensure they could meet Chinese demand while redirecting US LNG to other markets”, commented Nicholas Browne, head of Asia-Pacific gas and LNG at Wood Mackenzie.
In terms of energy, the list from the Chinese government includes nearly all commodities covered by Chapter 27 of the Harmonized System of customs codes. This chapter covers mineral fuels, mineral oils, bituminous substances, and mineral waxes. LNG seems to be clearly excluded from the list of goods that will face tariffs as the list jumps from code 27109900 (waste oils) to 27111200 (liquefied propane), excluding 27111100 (LNG). Natural gas in a gaseous state (27101210) is however included but of no significance given China cannot import pipeline gas from the US.
The exclusion of LNG is not surprising, in Browne’s view, given the rapid growth of China’s LNG demand and the fact that the US will be the key source of incremental supply growth in 2018 and 2019.
The success of China's coal to gas switching policy led to a very tight winter gas market in 2017/18 and gas shortages in the northern provinces. LNG was instrumental in limiting shortages and demand grew by a record 12 million tonnes in 2017 to reach 38 million tonnes. US LNG met 1.6 million tonnes, or 4% of China's LNG demand last year, according to Wood Mackenzie figures.
With coal to gas switching continuing at a rapid rate, LNG demand growth in 2018 is forecast to be at least 10 million tonnes to reach 49 million tonnes. “We currently forecast demand will grow an additional 9 MT in 2019 to reach 58 MT. We forecast that US LNG will account for 30% of incremental global LNG supply growth this year and 45% in 2019,” Browne said.
Tariff on oil would hit US exporters
Taking a tough stance on oil, China earlier threatened to tariffs on imports of crude oil and refined products from the United States.
Beijing’s drastic response came just hours after Trump released a list of $50 billion worth of Chinese goods subject to tariffs. The inclusion of energy tariffs took analysts by surprise given that previous tariff threats had largely focused on automobiles and agriculture. Hitting back, the Chinese government said it will levy a first round of tariffs on $34 billion worth of U.S. cars an agriculture products, starting from July 6.
At a later stage, another $16 billion in natural resources will be subjected to tariffs from China. If enacted, these tariffs would jeopardize growth in U.S. shale oil and gas production as China has emerged as one of the largest buyer of U.S. crude oil. According to EIA figures, China currently imports about 363,000 barrels of U.S. crude daily in Q1-2018, on par with Canada.
China is a significant outlet for US crude and WoodMackenzie says exports would be much higher in Q2 2018 given the lower WTI-Brent differential which made the arbitrage to Asia look more attractive. Sanctions might change everything, and while China could secure the crude from alternative sources such as West Africa which has similar quality as the US crude, the United States would find it hard to find an alternative market that is as big as China.