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Frozen U.S. Gas Projects Welcome Any Thaw With China

Easing of trade tensions between the U.S. and China could unlock new American liquefied natural gas projects that stalled this year while seeking customers. But people in the industry say they need more confidence that warmer relations will endure before they can move forward.

The U.S. is one of the world’s largest suppliers of shipped gas, and China is shortly to become the world’s largest buyer, but the standoff between the world’s two largest economies has hindered new deals.

The Trump administration’s efforts to shrink its trade deficit with China led to tit-for-tat tariffs between Beijing and Washington. However, the U.S. agreed at the G-20 meeting over the weekend to put on hold further tariffs on Chinese products, suggesting the spat won’t escalate in the first three-months of next year while trade talks continue. China will continue to levy the 10% tariff on U.S. LNG introduced in September.

Companies looking to export U.S. LNG see a trade truce as a step forward, but not enough to secure new contracts. On Tuesday, stocks and bond yields around the world fell in a sign of investor skepticism about the agreement.

“We expect that some of the discussions with Chinese counterparts, which have been continuing but at a slower pace, will only become more concrete and focused to reaching binding agreements once there is confidence that U.S.-China trade tensions have eased over the long term, ” said Vivek Chandra, chief executive of Texas LNG which is hoping to make a final investment decision by early 2020.

“In order for Chinese buyers and investors to begin signing long-term commitments with Texas LNG and other projects, they will want to see some certainty, both in terms of tariffs and tensions between the two countries,” he said. “Thus, there has to be meaningful progress over the next 90 days from both sides to resolve outstanding issues.”

Some projects already announced delays due to the trade dispute. In October Liquefied Natural Gas Ltd. said it was delaying a decision on whether to build its U.S. Magnolia project due to the trade issues causing headwinds for signing deals with Chinese customers.

The latest apparent cease-fire between the U.S. and China is a positive sign for the development of U.S. projects, giving “assurance that projects like Magnolia LNG will be able to execute long-term LNG export contracts with ‘off-takers’ from China without punitive external factors, ” said Micah Hirschfield, spokesman for LNG Ltd. The company’s time frame for a final investment decision remains in the first part of next year.

The U.S. shale revolution is catapulting the U.S. from being a net energy importer to a net energy exporter within the next five years. With over 100 million tons of LNG projects due to take a final investment decision in the U.S. next year, China is likely a key customer, given that its gas demand has been going through the roof in recent years. Last year Chinese LNG imports rose by around 50%.

China is switching from coal to gas to reduce pollution — a new gas power plant produces around half the carbon dioxide emissions of a new coal power plant. Beijing plans to increase gas’s share of its primary energy consumption to 10% by 2020, from around 7% last year, with a significant amount of the increase coming from LNG.

Banks financing LNG projects prefer to have most of the production pre-sold on long-term contracts, in advance of construction, to ensure payback.

China already imported around 15% of America’s LNG exports last year, but that has fallen to around 10% in the first nine months of this year.

The only long-term contract for the supply of U.S. LNG to China currently active is between Cheniere Energy Inc. and China National Petroleum Corporation, or CNPC, in a deal that started in July.

Thus far Cheniere has swapped the U.S. volumes for supplies from other countries such as Australian LNG to be shipped to China, helping avoid the Chinese tariff on LNG originating in the U.S.
Source: Dow Jones

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