China’s LNG tariff

Conglin Xu

Senior Editor-Economics

In retaliation for the US increasing the tariff on $200 billion in Chinese goods to 25% from 10%, China will assess a 25% tariff on US LNG starting June 1—an increase from the 10% level instituted in September (OGJ Online, May 14, 2019).

Since the LNG tariffs have been in effect, only four cargoes have been delivered to China from the US compared with 35 cargoes in the prior September-April period, Wood Mackenzie said in a research note. This is despite more than 30% growth in both Chinese LNG imports (32%) and US exports (38%) over the same timeframe. The increased tariff may reduce US LNG flows to China further, probably to zero.

In seeking a cleaner alternative to coal to generate electricity, China has been the world’s second-largest LNG importer. It was also the largest contributor to global LNG demand growth. According to Cedigaz, China’s LNG imports reached 71.6 billion cu m (bcm) in 2018, up 41% from 2017.

On its side, the US is the key source of incremental supply growth. The US Energy Information Administration projects that US LNG export capacity will reach 8.9 bcfd by yearend, making it the third-largest in the world behind Australia and Qatar. Cedigaz data show that US LNG supply jumped 62% in 2018 from 2017 to 28 bcm, accounting for one third of global LNG supply growth.

Currently, the US is not a major supplier of LNG to China, representing merely 4% of total Chinese LNG imports. Suppliers that are closer to China, such as Australia and Qatar, are more cost competitive with lower freight.

Despite the small volumes, US spot cargoes, concentrated in the winter period, play an important role in the short-term balancing of the Chinese market. In winter 2017-18, China suffered serious gas shortages and pipeline supplies issues. EIA data show that US LNG exports to China more than trebled during the 2017-18 winter compared with the same period a year earlier. Hence, a cut in US LNG exports means a loss of a flexible supplier in terms of volumes and pricing. China will be more vulnerable to LNG price spikes, notably in winter.

The impact of China’s LNG tariff on US is likely harder. Although most of the US capacity already existing or under construction has been backed by long-term agreements with non-Chinese firms, the spare plant capacity and most US LNG bought by portfolio aggregators is sold on the spot market. China accounted for nearly 15% of US LNG exports in 2017, behind only Mexico and South Korea. During the 2017-18 winter, US LNG exports to China accounted for about 20% of total US LNG exports. If global LNG demand growth weakens, the US will find it harder to maintain full export capacity utilization without Chinese customers.

Clouds over new LNG projects

Meanwhile, Chinese gas demand forecasts are underpinning several proposed US LNG export terminals, which rely on Chinese customers to sign long-term agreements. The escalation of the trade war between the US and China could cloud the new wave of US LNG projects.

In 2017, the two countries signed preliminary agreements for US LNG exports from Sabine Pass on the Gulf Coast of Louisiana, the Delfin export project, and a proposed Alaska project. In February 2018, China National Petroleum Corp. and Cheniere Energy signed two long-term contracts for 1.2 million tonnes/year of LNG from Sabine Pass and a new facility under construction near Corpus Christi, Tex.

As Chinese tariffs persist, Chinese buyers will hesitate to sign any new long-term contracts, and some US LNG projects might be delayed or even stalled. Cheniere and Sinopec agreed late last year on a 20-year deal that would supply 2 million tpy of LNG to China starting in 2023. This deal has not happened due to the heightened tensions.

Notably, since the trade war, Chinese buyers have announced deals signed elsewhere, including for projects in Mozambique and Canada and portfolio sellers like Qatargas and Petronas.