Trade War on Energy: Long-Term Changes in the LNG Market

Cost Estimation of US LNG to China

Key Take Away This Week:

  • The trade war will cut off US LNG from the Chinese market—a “must-win” market in the future. But for both sides, the near-term effect is manageable
  • Losing US LNG is unlikely to put China’s coal-phase out development in jeopardy, given the American energy’s limited role so far
  • Losing the Chinese market means losing the largest future cut in the global market. Alternative exist but risk is also there

The US and China’s trade war has become a critical factor when we look into the future of the Chinese and global energy market. If I may copy Jerome Powell’s words, “fitting trade policy uncertainty” into the world’s long-term energy scene is essential but “a new challenge.”

The immediate effect has shown. Already,  global oil prices, as well as Tesla, have felt the pain of the bitter trade fight.

But how about the long-term “stuff”? Here, the opinions on the long-term effect (on different energy sectors) have been highly divergent.

Would the potential retaliation from China by restricting rare earth export clouded the development of super-sized PMG turbines—like this interview mentioned? Would it put the fighting economies’ and global renewable development in jeopardy? Would it cost China’s moves towards natural gas and coal-replacement slow down, such as this analyst suggested? Triggered by many of these discussions, Energy Iceberg hopes to examine the trade war factors in several critical Chinese energy sectors. (I have some different views regarding the previous opinion piece.)

About a year ago, I wrote three commentaries regarding the trade war and its impact on Chinese nuclear and liquified natural gas (LNG) supply structure. [READ MORE about East Asia’s Gas Supply Future Under Trade War]

The short-term analysis has turned out to be true—Beijing has actively slowed down its nuclear ambition just to avoid using a reactor technology of US,  and US’s LNG export share in China plummeted to almost zero, with Beijing getting stronger ties with Russia. But as the fight continues to escalate, now it is time to update some of my thoughts, firstly on LNG.

[READ MORE about Sino-US’ “U-Turn” in Energy Cooperation]

Catch-up on the LNG Market under Trade War

To keep up with all the trade war updates now has become a tiring deed. Starting from May this year, the US announced to raise further the tariff to 25% on Chinese exports worth $200Bn; China fought back with a similar raise on $60Bn American products…Along the way, there are also additional Chinese firms being added to the “entity list,” and China’s talks about barring some critical raw materials exporting, and so on. At this point, the US-China relationship has been falling in a downward spiral.

On LNG—Beijing has added LNG in the list of US items facing 10% tariff last Aug; then a 25% tariff became effective since 1 June this year— unlike many analysts previously predicted.

The market appears to be business-as-usual, at first glance. In 2018, US LNG still took up 4% of China’s total LNG import, while Chinese imports grew YOY 42%, according to the Chinese Custom. US’ share in total Chinese LNG imports remained compared to that in 2017. On the US side, China last year accounted for 8.4% of its total LNG export, which was a share decrease compared to 14.6% in 2017. Notably,  US export witnessed a 53% jump, as it makes inroads in a new market—almost everywhere other than China (south America, Asia, and European countries).

In the short term, US LNG is a drop in the bucket of China’s demand. And the American LNG so far has been capable of finding its alternative destinations.

Near-Term Trade War Impacts

US will be completely cut off from China’s LNG market.

Already the country’s product has been uncompetitive following the 10% tariff. Last year, the average CIF of US LNG in China was at $9.82/MMBtu, compared the average LNG import price at $9.67/MMBtu. After the 10% tariff was intrdocued in Oct 2018, import from the US has already shrieked.

With the 25% tariff, US LNG will rise on average $2-2.5 to way over $10 (based on cost-back estimation). And the Economics and Technology Research Institute of CNPC recently estimated that the (hypothetical) CIF price could be $12.4/MMBtu. That is 28% more than the average LNG import rate.

Cost Estimation of US LNG to China

Evidently, the share of US imports will drop to close to zero.

Also, China has not signed any new LNG trade deal with the US suppliers ever since the 10% tariff. ENN, especially, called off a previous deal to acquire the LNG business of Toshiba US. Previous deals between Chinese mega oil&gas buyers (CNPC, China Gas, and others) have been suspended, too.

Little to none imports from the US would have a marginal effect on China’s near-term gas supply—or its ambition to deviate from coal, in my opinion. We should take into account that the imported LNG has been an expensive energy option for China anyway. It has been more expansive than pipeline gas (in general) and domestic production, and it faces rising competition from the cheaper renewable and innovative nuclear applications in the transportation, industry, and heating sectors.

US Gas imports to China - LNG, Natural Gas

Similarly, US suppliers argued that they are ok even without the Chinese buyers, as “the very low-cost American LNG will create its own demand.”—a quote from Reuters’ interview. Although in the same article, analysts argue that new LNG projects will be stranded, as these investment decisions typically require solid long-term contracts signing and those from Chinese buyers are crucial.

US Lose out the “Must Win” LNG Market in the Future?

How about the long-term influence? Here I may have different views compared to some of the analysis mentioned before. 

  • On China’s coal replacement ambition, the effect is negligible. The policy design has been criticized for being out of sync with market reality and hasty execution, etc. NEA is looking to modify China’s clean heating roadmap now by the recent release of a policy to fix some of the issues that occurred in “coal-to-gas.” An obvious option is to utilize the very cheap and domestic renewable power and storage technology as an alternative to gas. Notably, in Aug China has a PV auction that produced—for the first time—a power price lower than benchmark coal price. To deploy the otherwise curtailed renewable source is a stone for two bird and fits China’s pursuit of energy security.
  • On China’s gas market, there will be a lasting effect: as the country would strengthen ties with certain LNG exporter such as Qatar and Russia (as well as Australia). The shift would have both energy security and geological implications.
  • China is sort of a “must-win” market in the future. Last year, China recorded a massive 40% YOY demand increase for LNG, while the demands from the traditional LNG markets (JP, KR, TW) have been stable. China will be the primary growth region for LNG in Asia and will bypass Japan to take world’s No.1 importer position. As various upstream LNG projects under construction are set to come online in a few years, securing China would be significant.
  •  The US certainly could pick its battle in new markets—I agree with Reuter’s interviewee. Emerging market include India, Pakistan, as well as Bangladesh; a stronger presence in the Europe market will be the case. However, the economic perspectives of the emerging markets may bring uncertainty. And tensions with Russia over the European market may await.