Kent Moors, Ph.D. is executive chair of Energy Capital Research Group and president of ASIDA, Inc. His analysis represents his views alone.
As China closes in on becoming the top liquefied natural gas (LNG) importer in the world and the U.S. ramps up its LNG exports, a marriage seemingly made in energy heaven is still at risk of getting annulled.
LNG nearly became one of the biggest casualties in an increasingly acrimonious trade war.
Beijing put U.S. LNG imports on its list of products subject to tariffs, only to reconsider the move. China has the problem of responding to a major likely increase in American fees with less effective options in response.
I have been a vocal critic of U.S. President Donald Trump’s tariffs. They are simply bad policy. Better ways exist for handling trade disagreements. Even disregarding the contribution to geopolitical tension levels, they will cost more jobs and economic growth in the downstream American market than they are worth.
That’s even before the price tag of subsidizing U.S. farmers and others hurt are figured into the equation.
Trump unveiled the latest $16 billion of Chinese goods subject to 25% tariffs earlier this month, while threatening to up the ante to $200 billion. China responded in kind, initially putting LNG on the list (along with an extension of levies against imports of U.S. oil products). U.S. crude oil was already subject to tariffs, part of the response to the initial Trump tariff move announced in March.
The problem from the Chinese policy standpoint is now two-fold. First, the U.S. imports about four times as much from China as it exports there. That means Washington has far more leverage in selecting tariff targets. Chinese economic considerations, on the other hand, mean Beijing has more limited options in the tit-for-tat trade spat.
Second, applying tariffs to LNG will almost certainly price U.S. exports out of the Chinese market and deal a blow to the American export prospects. Until coming to a screeching halt in August, China had imported at least 17% more U.S. LNG in the first seven months of 2018 than it had for all of 2017. About 15% of all U.S. LNG had been going to China with the market prospects for significantly higher volumes in the offing.
But it also occasions a significant problem for China in developing a ready source of gas in its pursuit of an energy policy less dependent on coal.
That’s the basic reason why U.S. LNG appeared on China’s tariff list only to be withdrawn a few days later. As demand for natural gas grows, China has been evenly dividing imports between LNG and piped gas.
But throughput volume on the main Central Asia-China Gas Pipeline (CAGP) – the primary transit route for gas from Turkmenistan, Uzbekistan, and Kazakhstan – is now at more than 93% of capacity.
That means plans had called for an even greater increase in LNG imports. Yet pricing is an increasing problem. The recent Asian heat wave spiked what should have been off-peak prices in Japan and South Korea, the other of the top three LNG global importers. That wave hit the Chinese market.
As the peak price for both contracted and spot market, prices annually hit in October, the attempt by Beijing to engineer flexible demand policies will become more difficult if U.S. LNG consignments are priced out of the domestic market.
Having to rely upon the spot market for winter deliveries is very expensive. S&P Platts estimated that last winter China had to pay as much as $11.70 (80.40 yuan) per million BTUs. Put in perspective, that is more than 400% higher than Henry Hub prices (the benchmark for U.S. gas futures contracts) at close of trade on August 28.
Such a spread certainly explains why U.S. LNG exporters had eyed the Asian market generally, and China in particular, with so much anticipation. Meanwhile, Australia, where additional capacity is available at the four online northwestern projects, Papua New Guinea (offset by American company involvement there), Qatar (the world’s leading LNG exporter), and even Russia are already jockeying to pick up the available volume needed in the Chinese market.
For Beijing, the pricing balance between pipelines and LNG will become more difficult to maintain, while increasing uncertainty on export prospects will dampen U.S. prospects. Both sides are likely to experience some adverse impact on economic growth as this geopolitical game of chicken intensifies.
Unfortunately, neither side shows any indication of crying “Uncle.”