For US LNG, broad trade-war effects worse than tariffs

May 17, 2019
Politicization of energy and trade might matter more to US LNG exports and projects than a tariff raised by China amid a trade war.  

Politicization of energy and trade might matter more to US LNG exports and projects than a tariff raised by China amid a trade war.

The retaliatory May 13 tariff hike to 25% from 10% on US LNG cannot please exporters or companies approaching final investment decisions in a second wave of liquefaction-plant construction.

Several analysts, citing the growing Chinese and US positions in LNG trade, see jeopardy for those decisions.

But Nikos Tsafos, of the Center for Strategic and International Studies in Washington, DC, suggests pretariff conditions moderate the effects.

Relatively little US LNG flowed directly to China before the tariff hike or even before imposition of the original levy last September, Tsafos notes in a May 14 comment.

For US exporters, most direct business came from small purchasers. China’s three large national oil companies spurned long-term contracts with US suppliers because, the analyst says, they “simply did not trust the United States.”

Some US LNG reached those buyers anyway through portfolio companies with multiple supply sources and customers.

In 2017 and 2018, China relied on the US for about 4% of its LNG, accounting for slightly more than 10% of US sales.

Tariffs crimp that trade. But China will find other suppliers, and US exporters will find other buyers.

While the tariffs hardly help US LNG projects, Tsafos adds, “they merely solidify an unfavorable reality”—that Chinese buyers have never been major customers of US LNG and therefore are “not that critical for new LNG projects in general.”

A second wave of US LNG projects is still coming, Tsafos concludes.

He calls politicization of energy relations and trade “a bigger concern for long-term projects and for energy security, undermining confidence in an open market for energy and LNG.”

As “a proxy” for US-Chinese relations, the tariffs indicate peril for the global economy and the potential for “cascading” energy-market effects.

“Those second-order effects are likely to be far more important than whether US LNG can flow to China,” Tsafos says.

(From the subscription area of www.ogj.com, posted May 17, 2019. To comment, join the Commentary channel at www.ogj.com/oilandgascommunity.)