Editorial: Returning to China

Jan. 4, 2021

For much of second-half 2018, US crude exports to China were zero. The administration of President Donald Trump had started a trade war with China in March of that year, describing such conflicts as “good, and easy to win.” In 2017, China was the destination of nearly one-quarter of US crude exports. This fell to just under 5% in 2019, before rebounding to more than 15% in the first 10 months of 2020 following a Phase 1 trade agreement between the two countries.

US exports of crude oil and petroleum products to China spiked in May 2020 to an all-time high of nearly 45 million bbl, according to US Energy Information Administration (EIA) data. China took advantage of the suddenly low prices to fill storage. US shipments to China have remained at the previously unreached level of 25 million bbl or higher every month since.

In March 2020 shipments of US-sourced LNG resumed to China after a 13-month hiatus, the country having granted tax waivers to select importers. China imported 35 bcf of natural gas from the US in November, according to Kpler, roughly twice the amount shipped in March, as it built supplies to meet winter demand.

But even at these rates, China bought more LNG from both Australia and Qatar than it did from the US, and much potential commerce has been left on the table. As part of the Phase 1 deal reached in January 2020, China agreed to buy $52.4 billion of US-sourced energy products in 2020-21. But as of end-October 2020 just 13% of this trade had occurred.

The US return to China’s LNG market also has coincided with fortuitous market conditions. Rising global prices since April 2020 have kept US LNG exports to China viable. S&P Global Platts’ spot price Japan-Korea Marker (JKM) on Dec. 15 reached a 6-year high of $12.40/MMbtu. But these prices are expected to fade as winter wanes and shipping constraints ease, making US supplies even less competitive than they already are when compared with those from closer sources.

US LNG liquefaction projects awaiting final investment decision cannot be sanctioned on the vagaries of the spot market. Projects of this scale require long-term sales agreements. China is the second largest LNG importer in the world behind Japan and has far more potential for continued growth.

In November 2020, Cheniere Energy Inc. signed a framework agreement with China-based Foran Energy Group for the sale of 26 LNG cargoes between 2021 and 2025, the first such deal since the trade war began.

This is a good start but gaining sustained access to the world’s largest market requires more be done. A trade deal that isn’t enforced is worse than no trade deal at all.

Market participants should have free access to markets. Barring this, governments should at least do their companies the courtesy of forcing compliance existing deals. Failure to do so creates a worst-of-both-worlds scenario in which consumers suffer higher prices while producers struggle for both market stability and market share.

The time is now

Despite the uncertain footing of trade with China, total primary US energy exports for the first 9 months of 2020—the vast majority of which were either natural gas or petroleum—were 1.8% higher than the same period a year earlier, according to EIA.

The groundwork is there for US energy producers to rebound rapidly in a post-COVID recovery. But for this potential to be fully realized they will need as much access as possible to China’s vast market.

It will be up to the administration of President-elect Joe Biden to either enforce the terms of the current deal or scrap it and return to a pre-tariff footing. Either will be better than the middling, compass-less course US-China trade has been on since the war was declared.