Tit-for-tat trade tariffs keep escalating the Sino-U.S. trade war and threaten to delay the second wave of American LNG export projects. Tellurian and other developers are expected to delay final investment decisions (FIDs) on US LNG export projects in the absence of firm offtake contracts from key Chinese buyers.
Retaliating to Washington’s tariff increase on $200 billion in Chinese goods, Beijing in June raised its tariff on U.S. LNG imports from 10% to 25%. This levy, together with a climate of mistrust, has made Chinese state-owned buyers shy away from signing offtake agreements with U.S. LNG projects – much to the detriment of smaller developers.
Bank of America observed that smaller LNG developers face fierce, often break-neck competition from cash-rich oil companies like Exxon Mobile and Shell which do not need to sign long-term offtake agreements before building multibillion-dollar LNG export terminals. But also majors like Tellurian are likely to push back FID on its Driftwood LNG project from the second half of 2019 to mid-2020.
Tellurian told investors it will retain more of the terminal’s liquefaction capacity to its own than planned earlier, probably in the absence of firm offtakers. If it will build all five trains with combined capacity of 27.6 million tons per annum, it will retain 13.6 mtpa from the facility to market on its own. Partners and offtakers are required to make an upfront $500 million equity investment in Tellurian‘s holding company that controls Driftwood LNG.
Total recently committed to invest equity into Driftwood LNG and agreed buy 1.5 mtpa from the project, but there is still work to be done. “As soon as we finish documents we will take FID," Tellurian spokeswoman Joi Lecznar said, remaining rather vague about the timing of financial close, although project startup is still scheduled for 2023.
Trade war ends direct LNG trade
Goldman Sachs analysts warned the tariff could “effectively end direct LNG trade” between American exporters and Chinese importers, or led to a fast drop in purchases of spot LNG cargoes. In fact, China last imported a U.S. cargo in March 2019 and nothing else since, according to Refinitiv trade flows. Instead, China received more cargoes from Australia, Russia, Cameroon, Egypt, Indonesia, Nigeria, Oman, and Malaysia.
Seeking to circumvent tariffs, some cunning traders 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.
Political tensions have made U.S. shipments to China fall off a cliff. Between February 2016, when LNG exports began from the Lower 48 states, and the start of the trade war in July 2018, China used to be the third largest buyer of American super-chilled natural gas. So far this year, China is no longer in the top ten.
Beijing latest LNG tariff increase from 10% to 25% further reduces the number of U.S. shipments, although analysts say “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.”
No Chinese funding for US projects
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 heads of agreements (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 mpta in 2019 and another 30 mpta in 2020, while demand in high-priced Asia Pacific markets will only grow by 12 mpta and 16 mpta 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.”