US LNG project developers hit hard by escalating Chinese tariffs

Monday, 03 June 2019
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The biggest losers of tit-for-tat trade politics between the United States and China are developers of US LNG export projects. Debt-financing for such costly infrastructure projects is now hard to come by as many medium-sized projects are not underpinned by firm
offtake through contractual sales and purchase agreements (SPA). Worse still, state utility buyers from China now certainly won’t sign any SPA for longterm US gas supplies as long as the trade war keeps escalating.

Already when the 10% tariffs on US LNG imports were enacted in September, no more Chinese buyer was signing up to long-term US LNG supplies. That pattern now is reinforced with tariffs rising to 25% from June 1.

The cause of the trade battle is President Trump’s conviction he could pressure Beijing into improving its practices around technology transfers, enhance market access for foreign companies and protect intellectual property rights. Escalating tariffs, however, are hampering global trade and Beijing’s retaliation on Washington’s latest round of tariffs is hitting one of President Trump’s favorite industries: oil & gas.

Cheniere Energy CEO Jack A. Fusco kept his chin up and told analysts in mid-May, “there haven’t been any spot cargos that haven’t cleared the US and made a margin,” – but Chinese utility buyers like PetroChina, CNOOC and CNPC are acting more cautious. Seeking to circumvent the steeper tariffs, some cunning traders are understood to have approached their suppliers, asking for shipments from non-tariff nations instead. If this proves to be impossible, hard-nosed buyers may opt to pay a break-up fee to get out of such contracts, rather than having to pay the higher tariffs. In any event, the sheer volume of US gas exports to China will decrease drastically.

Shipments of US LNG grind to a halt

Shipments of US LNG to China have already fallen off a cliff. Since the 10% tariff was enacted in September, only four US LNG cargoes were delivered to China compared to 35 cargoes in the prior September through April period. According to Wood Mackenzie figures, this is despite over 30% growth in both Chinese LNG imports (32%) and US exports (38%) over the same timeframes.

“The tariff increase from 10% to 25% will reduce flows to China further,” analysts cautioned, although “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.”

Before tariffs were imposed in September 2018, China was getting close to importing 141.6 billion cubic feet (Bcf) of US LNG, up from 103.4 Bcf in the previous year and 17.2 Bcf in 2016. By year-end 2018, the tariffs had reduced China’s actual imports of US LNG to just 93.9 Bcf, worth
approximately $426 million.

China signs no new SPAs for offtake of US LNG

Stable, long-term trading relations are unthinkable between Chinese buyers and US sellers these days. The last long term contract signed by a Chinese offtaker and US seller was in February 2018 – before the Trade War began, when PetroChina signed a 25 year sales and purchase agreement (SPA) with Cheniere Energy.

Since then, Chinese buyers have announced both SPAs and HOAs from the rest of the world, including projects in Mozambique and Canada, and portfolio sellers like Qatargas and Petronas. Wood Mackenzie warns “an ongoing trade war will continue to create hesitancy for Chinese buyers to sign up for new long term volumes.”

Looking forward, strong LNG supply growth is seen to continue outpacing demand through 2020. Supply will grow by 38 million tons per annum (mtpa) in 2019 and another 30 mtpa in 2020, while demand in high-priced Asia Pacific markets will only grow by 12 mtpa and 16 mtpa, in 2019 and 2020 respectively. According to analysts, “this market length creates flexibility to redistribute and optimize trade flows, especially as the US is one of the more distant sources of LNG for China.”

While President Trump has broken much political porcelain with Chinese gas buyers, destination swaps may help some LNG traders to circumnavigate the escalating tariffs – but the real winner on the energy front is Russia.

Russia's Gazprom – the laughing third

Sino/U.S. trade tensions are playing in the hands of Russia and allow it to increase exports of pipeline gas through the soon-to-be-opened Power of Siberia Pipeline to China. Russia is already seeking to increase LNG shipments from Sakhalin to China and is speeding up the development of its proposed Vladivostok LNG project.

Forging ahead with construction of the ‘Power of Siberia Pipeline’ and the western/eastern route, Gazprom will soon have two major interconnectors for delivering Russian pipeline gas to China. Preparations are underway to start injecting natural gas into the ‘Power of Siberia’ pipeline to China in Q3-2019. Works are “going according to schedule”, Gazprom chairman Alexey Miller told CNPC chairman Wang Yilin recently at a working meeting in Beijing.

Together, Russia’s two Siberian gas interconnectors are estimated to supply almost 17% of China's total gas needs by 2020 – reducing the room left for LNG imports. In terms of pricing, the first deal between CNPC and Gazprom for a western pipeline route from Russia to China foresees 38 Bcm/year gas supplies at a price of $10/MMBtu, while Chinese LNG buyers need to pays up to $16/MMBtu for a spot cargo.

In the interest of energy market economics, the U.S. President would be well advised to return to the negotiation table. Chinese gas buyers are not in a hurry to budge because they have choices. They can opt for Qatari, Australia or Russian LNG instead in addition to importing more very cost-competitive pipeline gas from Turkmenistan, Kazakhstan and Russia, China’s big northern neighbor and political ally. How close these relations are becomes apparent from the veiled warning of Chinese Foreign Minister Wang Yi against “outside interference” in the relationship between the two countries. Wang said China-Russia relations set an example “beyond compare”, while the world was “in chaos and disorder”. 

 

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