The US trade war with China may mean LNG companies planning new facilities could face challenges in financing, contract pricing and pipeline access. Total photo.
China put a 10 per cent tariff on US LNG imports last month as trade war continues on
On Tuesday, US President Donald Trump hinted there could soon be an agreement with China to end the ongoing trade war between the two global economic giants. The end of the bitter trade battle will not come soon enough for LNG companies looking to build facilities in the United States.
The US – China trade war comes at a time when the United States is positioning itself as the dominant provider of LNG to Asian nations, many of which are moving away from coal to cleaner burning natural gas.
Tellurian Inc, NextDecade Corp and Venture Global LNG have so far been stymied in their efforts to get their multi-billion dollar US LNG projects going. One major reason for the delay is Chinese buyers are reticent to sign agreements to purchase US LNG as long as the two countries continue to slap tariffs on the other’s exports.
On Monday, Australia’s LNG Ltd. delayed a decision on building its Louisiana-based Magnolia LNG plant because it was struggling to line up Chinese customers. According to Reuters, bankers and analysts in the sector are also questioning if the next wave of projects would be adequate for investors.
“Chinese LNG demand growth is the largest piece of demand growth out there, and Chinese buyers have got to feel reluctant to commit to US capacity when the US government sees trade as a means of exerting political leverage,” Bob Ineson, managing director of North American natural gas at IHS Markit told Reuters.
Earlier this month, Shell and its partners announced it will go ahead with the $40 billion LNG Canada project in Kitimat, British Columbia. The project is set to deliver 14 million tonnes per year of new capacity before 2025 and has the option to double that output.
“There is a clear and growing demand for natural gas, globally – especially in developing countries such as India and China. Canada has an opportunity to supply that market with responsibly produced resources and realize the important economic benefits that come with it,” said Tim McMillan, CEO of the Canadian Association of Petroleum Producers, in an Oct. 2 press release.
“It is essential for Canada to access new markets. While Canada has abundant natural gas resources, the United States, our largest competitor, is currently the only international customer for western Canadian natural gas.”
Chinese imports of LNG have nearly tripled since 2015 after Beijing called for a switch from coal to natural gas for heating millions of homes in China. Last year China became the second largest importer of LNG behind Japan and next year, China is expected to become the largest importer of liquified natural gas.
The skyrocketing increase in Chinese demand for LNG has erased an anticipated LNG glut and boosted spot prices to near four-year highs and stopped a four-year long freeze on new project investment.
By the mid 2020s, global LNG demand is expected to be between 360 million to 450 million tonnes, up from about 290 million tonnes in 2017 and China is leading that growth in demand.
Rystad Energy says China’s LNG demand was as 38 million tonnes in 2017, a 45 per cent increase from 2016 at 26 million tonnes.
“This jump was mainly driven by increased demand in the power and residential sector as the country pursues an aggressive plan to switch from coal to gas. This trend is expected to continue, due in large part to the government policies guiding the energy mix and because domestic production and new pipelines are insufficient to meet demand,” the company said in a Sept. press release.
Rystand forecasts Chinese LNG demand to reach about 90 million tonnes by 2025.
“My instinct would tell me that the larger companies have the resources and relationships to get these things approved, because they’re just enormous projects,” Charlie Cone, an LNG analyst with energy data firm Genscape told Reuters.
In September, China put a 10 per cent tariff on US LNG imports. So far, the United States has slapped tariffs on $250 billion worth of Chinese goods and Beijing has responded with duties on $110 billion worth of US goods.
With the trade war ongoing, China is not signing any long-term agreements with US projects until the trade war is over, two US industry sources told Reuters.
That means construction of at least six new builds or expansions worth over $100 billion is in doubt. These companies face a number of challenges, including financing, contract pricing and pipeline access, according to Reuters’ sources.
LNG Canada’s chief executive Andy Calitz last week told Reuters that US upstarts could end up “dead in the water” as long as China keeps its tariffs on US imports. Should that happen, it would be a boon for small Canadian projects, including Woodfibre LNG and Goldboro LNG.
Ineson says non-Chinese buyers are also concerned about the viability of long-term deals because of changing trade policy. “This conflict could lead to many developers of U.S.-based projects missing this window,” IHS’s Ineson told Reuters.
Prince Rupert will see 2-3 LNG plants revive their plans within the next 6 months. There is a constant buzz of LNG execs visiting sites in the area – and it has a 17 hour shipping advantage to LNG Canada in Kitimat.