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Protracted Trade War Inflicts Lasting Damage To U.S. LNG

Irina Slav

There were early warnings: Chinese investors became reluctant about investing in U.S. LNG projects soon after President Trump fired the first shot in what has turned out in a full-fledged trade war with China. Now, according to Citi analysts, the trade war could inflict lasting damage to the nascent U.S. LNG industry.

S&P Global Platts quotes in a recent story a note by Citi saying "China has not only paused (or shelved), pending LNG deals with the US, but it also appears to be reassessing its long-term investments in the US. This reassessment reflects escalated trade tensions, a recent slowdown in Chinese gas demand prompting a more extensive debate on China's long-run gas demand growth, and the potential reexamination of Sino-US relations.”

This is a potentially serious problem because the global LNG space is anything but quiet. U.S. producers, especially the ones that have yet to begin production and exports, which are the most vulnerable to this change in sentiment, face increasingly stiff competition from Australia, Qatar, Russia, and newcomers such as Argentina, Papua New Guinea, and—in the medium term—Mozambique.

U.S. LNG capacity could reach a daily processing rate of 8.8 billion cu ft this year and rise further to 10.1 billion cu ft daily in 2020, from 3.8 billion cu ft daily in 2018. However, all this is contingent on the companies behind the projects securing long-term contracts with buyers.

For now, U.S. LNG has ruled the spot market and Chinese buyers have been happy to get it from there. But to secure the size of funding necessary for that capacity expansion mentioned above, companies need long-term purchase commitments and, according to Citi analysts as well as other industry observers, these will be hard to come by from China even if the trade war ends with a truce or, hopefully, a lasting peace.

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The problem is even if the war ends, the uncertainty will linger on. This is only to be expected: there were so many optimistic reports just a month ago and then things suddenly went downhill when President Trump said the talks were going too slowly and added more Chinese goods to Washington’s tariff list. China struck back with tariffs of its own and now, even though more talks are scheduled for the G20 summit, forward-planning LNG buyers would likely prefer to bet on Australian, Qatari, or Russian LNG for long-term deliveries than on U.S. gas.

China is the fastest-growing LNG market and seeing their access to this market shrink would not make U.S. LNG producers happy. Yet the bigger problem is that their alternatives as main export market are limited.

True, Europe has undertaken to boost its intake of U.S. LNG from 4 to 8 billion cubic meters annually over the next four years. Yet 8 billion cubic meters is equal to about 6 million tons of LNG. That’s tiny portion of existing and planned U.S. production capacity: Cheniere Energy alone will have a capacity to produce 27 million tons of LNG annually at the Sabine Pass facility. At the same time, Novatek’s LNG exports to Europe in a single month—February—stood at 1.41 million tons.

Asia is a logical choice and within Asia, India would make the most sense as a destination for U.S. LNG. Demand for LNG on the subcontinent is rising fast as well and bilateral relations are a lot better than they are with Beijing. U.S. LNG is touted as very flexible. Perhaps now is the time for its producers to become more flexible, too, and find alternative markets for their product.

They would also need to find alternative sources of financing for their projects and this might prove the trickier bit as the LNG market goes into deeper oversupply. While this will be temporary and in the medium term demand will catch up with supply, the supply will need to be there and for it to be there, investments are needed sooner rather than later.

By Irina Slav for Oilprice.com

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