Trade War Disrupts China’s Liquefied Natural Gas Supply

US developers, exporters pivoting to Europe
By Fan Yu, Epoch Times
October 6, 2019 Updated: October 6, 2019

News Analysis

Natural resources are commodities that are often most sensitive to global trade disruptions.

The continuing U.S.–China trade war has weighed on the global liquefied natural gas (LNG) market, since the two parties also happen to be two of the world’s biggest LNG players—the United States as an exporter and China as a mass importer.

While the trade war has slowed U.S.–China LNG trade to a crawl, China recently moved to secure some much-needed supply. The San Diego-based Sempra Energy on Oct. 1 signed a deal to sell its ownership in Luz del Sur—Peru’s largest utility—to China’s state-owned China Yangtze Power International for $3.6 billion. As part of the deal, Sempra also signed a multi-year agreement to sell LNG to a subsidiary of China Yangtze Power.

Tariffs

It’s the first U.S.–China LNG deal in more than 12 months, as retaliatory tariffs China has placed on U.S. LNG cut U.S. shipments to China to a trickle. In September 2018, Beijing imposed a 10 percent tariff on U.S. LNG imports; the duties were subsequently raised to 25 percent in June 2019. It was one of the last product categories Beijing spared from retaliatory tariffs.

The deal—signed amid heavy tariffs—underscores China’s dependency on foreign LNG and how desperate it is to secure supply.

The Chinese regime intends to curb the country’s reliance on coal as a primary fossil fuel. Its latest Five-Year Plan, announced in 2016, seeks to reduce the consumption of coal. In its place, gas was identified as a key replacement in the residential, power, and industrial sectors.

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 that’s been cooled and compressed into liquid form (at minus 260 degrees Fahrenheit) so that it can be transported efficiently on ships and over land.

China’s demand for LNG has been soaring. It’s 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 to around 57 billion cubic feet/day by 2040 from 15 bcf/d in 2015, second only to the United States. A significant portion of that consumption will be in the form of LNG.

US Supply Pivot

Recent tariffs have effectively halted U.S. LNG supply to China.

Discussions held in March 2019 between Sinopec and Houston-based LNG giant Cheniere Energy were put on hold due to the uncertain trade outlook.

“While a trade deal has not yet been reached [between U.S. and China], it is unlikely that Chinese buyers would firm up agreements for spot or short-term LNG supply,” an industry source told S&P Platts.

Industry sources told S&P Platts that PetroChina earlier this year diverted U.S. LNG tankers for a cargo swap to avoid paying tariffs. This year, China has taken custody of four cargo ships compared to 33 cargoes during 2018, a reflection of reduced LNG trade due to high levies.

U.S. shale gas production isn’t ceasing, however. Suppliers have actively been pivoting away from China to new markets in Europe and Asia. President Donald Trump has been a key promoter of U.S. LNG supply when he’s met with other heads of state this year.

Demand from Europe is increasing, as many Western European nations are looking for ways to alleviate Russia’s effective gas monopoly over Europe. While 30 LNG import terminals are already operational across Europe, more terminals are coming online in 2020 to handle LNG tankers.

But with three new LNG plants going live in 2019 in the United States and increased production from Australia, LNG prices are expected to plateau and the usual winter price spike may be muted this year, according to experts.

“However, even with a strong fourth quarter, it seems China’s LNG demand growth will be considerably lower in 2019 than it was in 2017, when it jumped 48 percent on the year, and in 2018, when it increased by 41 percent,” according to an Oct. 3 Reuters report, citing Refinitiv data.

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