China Sparing US Liquefied Natural Gas in Trade Dispute
Last week, China slapped a 25-percent import duty on a host of American imports, including fossil fuels such as crude oil and coal.
Beijing’s actions were in retaliation to President Donald Trump going ahead with his proposed $50 billion tariffs on Chinese industrial products. While almost all forms of U.S. fossil fuels were included in China’s retaliatory tariffs, liquefied natural gas (LNG) was conspicuously absent.
This was no oversight, however. While China may eventually decide to tax LNG imports should the trade dispute escalate, it has been left alone because of American LNG’s importance to Beijing’s current energy policy.
The Chinese regime wants to curb the country’s reliance on coal as a primary fossil fuel. Its latest Five-Year Plan, announced in 2016, seeks to reduce consumption of coal. As part of the plan, Beijing mandated a reduction in the share of coal as part of China’s total energy consumption from 63 percent to 55 percent by 2020. In its place, gas was targeted as a key replacement for the residential, power, and industrial sectors.
China’s Soaring LNG Demand
Typically, natural gas is delivered via pipeline networks, which are expensive to build and maintain, and the scope of the market is limited to the physical reach of the pipelines. LNG is natural gas cooled and compressed into liquid form (at minus 260 degrees Fahrenheit) so that it can be transported efficiently on ships and over land.
With Russia’s Siberian gas pipeline into Northeast China scheduled to be completed in late 2019, LNG importation is still the best way for China to obtain foreign gas.
The fact is, China’s demand for LNG has been soaring, and it receives much of its supply from the United States. It’s also projected to be one of the world’s biggest consumers of LNG going forward. The U.S. Energy Information Agency (EIA) estimates that China’s demand for gas would increase from 15 billion cubic feet/day (bcf/d) in 2015 to around 57 bcf/d by 2040, second only to the United States. A significant portion of that consumption will be in the form of LNG.
In 2017, China was the third-largest importer of U.S.-sourced LNG, behind Mexico and South Korea, according to the EIA. Exports to China made up 15 percent of all U.S. LNG exports. During the first five months of 2018, China bought about 22 percent of all U.S. LNG exports, according to Reuters, which is a far higher rate than 2017.
‘An Essential Good’
It’s not a coincidence that LNG has been spared tariffs thus far. Beijing sees American LNG as part of its future energy security.
There has been growing collaboration between China and U.S. LNG companies in recent months. In February, state-controlled China National Petroleum Corp. signed a 25-year long-term import deal with Houston-based Cheniere Energy to buy U.S. LNG. In another deal brokered late last year, state-controlled Sinopec Group and Bank of China signed a multi-year, $43 billion development deal with the state of Alaska to develop Alaska LNG, which includes an Alaskan LNG export terminal and an 800-mile long pipeline from Alaska to China to supply gas.
“LNG is clearly seen as an essential good by the Chinese government,” said Nicholas Browne, head of Asia-Pacific gas and LNG at Wood Mackenzie, an energy consultancy. “Given this, in the event of an escalation, LNG is likely to remain outside the bounds of any additional tariffs.”
Browne also noted that any tariffs on LNG would have created a significant challenge for Chinese consumers given surging demand growth. China experienced gas shortages last winter as Beijing accelerated its shift away from coal.
To be clear, tariffs on American LNG could still happen. China can replace U.S. gas with another supplier by paying more for its LNG. The oil and gas industries—which are concentrated in the southern and midwestern states—largely back Trump, and any prolonged period of tariffs could hurt Trump’s voter base, from Beijing’s perspective.