US LNG spared from Chinese tariff dispute escalation

Source: Heren


US exports of LNG have escaped China’s initial retaliatory actions against tariffs imposed last week by US president Donald Trump.

The Chinese government unveiled plans on Saturday, 16 June, to introduce an additional 25% tariff on a range of US energy, marine and agricultural products.

The duties have a total estimated annual value of $50bn, the same approximate annual value of Chinese product imports imposed by the US on 15 June.

In a move that threatens a major upheaval of global energy flows, China has proposed to include additional duties on a swathe of energy-related products, including crude oil, fuel oil, diesel, naphtha, kerosene and LPG.

LNG was conspicuously absent in the list of products subject to the additional 25% tariff. This underlies the growing importance of LNG in Chinese energy policy as it seeks to curb carbon emissions and reduce its reliance on coal by implementing aggressive coal-to-gas switching initiatives.

Chinese gas demand grew by over 15% last year to 239.2 billion cubic metres, partly driven by the need to meet 2017 year-end environmental targets.

With the country’s import dependency expected to grow significantly in the coming years, LNG will play a key role in meeting China’s import requirements as well as helping to alleviate any seasonal gas shortages.

Chinese LNG imports rose by a record 12.4m tonnes in 2017 to over 39m tonnes, accounting for 22% of supply, ICIS data shows.

But US LNG only accounted for 1.51m tonnes of the overall 2017 import total, according to LNG Edge.

US imports have already surpassed 1.6m tonnes in the year to date, and with the US set to be the key source of incremental supply growth until 2020, the share of US LNG in Chinese import mix is set to grow.

In February, PetroChina became the first Chinese company to sign a supply deal directly with a US LNG project, when it committed to purchase 1.2mtpa from Cheniere Energy over 25 years starting from 2018 in two supply agreements .

This was augmented with a further supply deal with Cheniere, with the Chinese buyer agreeing additional volumes from 2018 to 2020.

Additional tariffs on flexible US LNG would only limit the options for Chinese LNG buyers to secure additional volumes directly from US liquefaction projects to meet their demand requirements over the next few years.

It would also create significant challenges for suppliers such as Shell and Total that have long-term supply deals in place with Chinese buyers, but will utilise their US LNG positions to optimise their portfolios.

“The trade war between China and US is at a nascent stage with an uncertain extent or duration. However, LNG is clearly seen as an essential good by the Chinese government,” Nicholas Browne, said head of Asia-Pacific gas and LNG at consultants Wood Mackenzie in a report released on Monday, 18 June.

“Given this, in the event of an escalation, LNG is likely to remain outside the bounds of any additional tariffs.”

While US and Chinese mutual interests may have ring-fenced LNG from any imposition of direct tariffs, it remains to be seen whether the escalating dispute will have any impact on the dynamics between a host of brownfield and greenfield liquefaction projects in the US, Qatar, East Africa, Russia and Canada competing to secure sufficient buyer support for the next wave of LNG supply. Ben Wetherall