Tariff Tiffs, U.S. Exports, and Asian LNG Part II: Where It Goes from Here

Tariff Tiffs, U.S. Exports, and Asian LNG Part II: Where It Goes from Here

by | published July 24th, 2019

I often play the intermediary between a major international energy conference – in which I play a public role – and private sidebar meetings.

Thanks to these public and private roles, I’m given access to knowledge and indicators of where the energy world is moving at any given time. For example, one recent conference I attended involved liquefied natural gas (LNG).

Now, last week,I laid out the factors influencing U.S. LNG exports to Asia in general and China in particular.

Today, I want to focus on what the picture looks like moving forward.

All indicators point toward Asia comprising the primary demand generator worldwide for the next several decades

And there are several overarching considerations and some very new developments changing the landscape.

Let’s take a look…

China’s LNG Problem

First, given the acceleration in Asian energy demand, U.S. LNG exports to Asia have been regarded as an essential ingredient in two ways; meeting that demand, and in providing an expanding market justifying additional U.S. production. In short, that LNG was to serve as both an external and a domestic stimulus.

Second, Chinese imports are expected to comprise a major component of those exports in the initial period of U.S. LNG provision to Asia.

Third, the White House’s decision to apply American tariffs on a wide range of Chinese goods has resulted in Beijing applying counter-tariffs against U.S. products entering China.

These moves initially did not include U.S. LNG, although it did apply to crude oil and oil products. Later, a 10% tariff was laid against LNG, and further even higher to 20%, a levee that still exists today.

Fourth, LNG has been a factor in assessing Chinese ability to meet its internal energy demand as colder weather approaches. Decisions regarding how much is imported to meet that demand must be made very soon.

Currently, China is patching together alternative non-American sources of LNG (and, for that matter, crude oil and oil products) to offset a significant cut in imports from the U.S.

For the first time since LNG exports began to China, the U.S. exported no LNG at all to China for the entire second quarter of 2019.

China Underestimated Its Needs

To put all these points in perspective, China had been accounting for the single fastest rising portion of U.S. LNG exports, with the American volume accounting for a projected 15% of all LNG imports to China by 2020.

Those estimates, however, were drawn before the tariffs arose.

Every market analyst I speak to still believes that:

  • The U.S. will become a dominant exporter to Asia in relatively short order, and
  • China will figure prominently in that trade.

Of course, that requires a resolution of the tariff war.

Here, the consensus in Washington points toward China having to cry “uncle” first. The reason addresses the major problem experienced last year in meeting Chinese internal winter energy requirements.

By October, China had underestimated both the severity of the oncoming winter and the amount of contracted LNG imports. The result was a rapid spike to the highest-end user costs in a decade. The Trump Administration believes China’s domestic situation will force it to renew imports from the US.

My sources at major U.S. LNG exporters share that view. While these folks expect a short-term stricture in exports to China, they also believe the market realities will force Beijing to import.

Well, this is now the focus of some late developments. They call into question the assumption that China will relent.

Several weeks ago in London, I was able to confirm the two main components of this new direction.

Russia Is Joining the Fray with China

The occasion was my appearance at the Iraq Petroleum Conference, during which I held a number of side meetings on a range of energy issues.

As often happens at such events, my discussions extended well beyond the subject matter of the conference. And on this occasion, some addressed the LNG export situation, both to Europe and Asia.

First, my network of contacts has been buzzing over a pending agreement between China and Russia to increase Russian LNG exports from the Sakhalin projects off the Russian Pacific coast.

While in London, I confirmed that the process is well advanced, and I received that information directly from an official at Gazprom, the Russian natural gas behemoth. Gazprom expects an impending announcement of LNG forward deliveries to China. The process is so advanced that the Russians are beginning to reprioritize the recipients of future consignments to make way for the new Chinese exports.

Dr. Moors in a “side bar” with Lavrenty Pilyagin, director of Gazprom Marketing & Trading, London, June 29, 2019.

Second, China has entered into negotiations to increase imports from the Mideast. This is centered on Qatar, the world’s largest exporter of LNG, and is likely to involve a complicated arrangement of direct sales and contract swaps involving natural gas flows from several Persian Gulf sources, including Iraq.

Now, one of the officials in the center of this expanding series of discussions, is this fellow – Ambassador Ramon Blecua, Head of the EU Delegation to Iraq.

Dr. Moors and Ambassador Blecua in a private conversation, London, June 29, 2019.

Those involved in this series of negotiations expect the Persian Gulf, booth in direct LNG shipments and via indirect pipeline/shipping swaps, to play an increasingly important role in meeting Chinese energy needs during the trade tiff with the U.S.

U.S. exporters may experience some rise in trade with Europe to offset expected near-term losses in volume to China.

But those expecting China to roll over in the renewed negotiations with the U.S. may be avoiding the new reality of how far Beijing will go to make its point to Washington.



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