China’s LNG tariff threatens Trump energy export goal

China’s move to increase tariffs on $60bn in US goods targets a commodity central to the Trump administration’s goal of exporting more energy: liquefied natural gas.

Trade in gas condensed for shipment on ocean vessels has boomed in the past five years, reaching a record 316.5m tonnes in 2018, according to the International Gas Union. China has become the world’s second-biggest LNG importer as it seeks a cleaner alternative to coal to generate electricity.

Liquefaction plants sponsored by energy majors such as ExxonMobil and independent companies such as Cheniere Energy promise to make the US an important LNG exporter, following its ascent as the premier natural gas supplier after shale drilling transformed its production.

China’s 25 per cent tariff on US gas has jolted that trajectory. The duty, announced this week in retaliation for added tariffs from the White House, is a rise from an earlier 10 per cent levy that China imposed last September. It is due to take effect on June 1.

The escalation creates tension between the US attempt to apply pressure on China to reform trade practices and its hope of using energy exports to exert influence in international affairs. Underlining the significance of LNG, President Donald Trump on Tuesday visited the newly constructed Cameron LNG terminal in Louisiana.

“The US has positioned its natural gas resource as hydrocarbon freedom — the administration has taken that stance. But the fight for freedom has gotten a little bit more difficult,” said Kevin Book, managing director at ClearView Energy Partners, a consultancy in Washington.

The first exports of US LNG outside of Alaska left Cheniere’s plant at Sabine Pass, Louisiana, in early 2016. Cheniere has since completed five trains, or liquefaction units, at Sabine and the first train at another terminal in Corpus Christi, Texas. Another plant opened in Cove Point, Maryland, last year, with Cameron and others set to begin exporting this year.

The higher tariff in China would exacerbate the effects felt since the first one took effect. From September 2018 to April, the US delivered four cargoes to China, down from 35 cargoes in the same eight-month period of 2017-18, Wood Mackenzie said in a note. The slowdown came even though China’s imports and US exports each grew about a third, the consultancy noted.

“A 25 per cent tariff is probably going to mean that no US LNG will be going to China,” said Nikos Tsafos, senior fellow at the Center for Strategic and International Studies in Washington.

He added that the effect on current LNG facilities would be minimal because “the market has already adjusted and the US LNG will be going somewhere else”.

The bigger impact may be on projects for which contracts have not yet been signed. Companies seeking to finance LNG plants must first obtain long-term commitments from customers.

“In addition to the short-term impact, tariffs also have the ability to make long-term contracts more difficult to negotiate,” said Charlie Riedl, executive director of the Center for LNG, a trade group.

The only Chinese company to have signed a long-term supply agreement with a US LNG project was a division of China National Petroleum Corporation, which last year committed to buy gas from Cheniere through 2043. Underscoring US concerns, a division of CNPC and the Chinese state-owned oil company Cnooc last month took stakes in the proposed Arctic LNG 2 led by Novatek of Russia.

Cheniere’s shares fell 3.3 per cent after China announced the tariff increase on Monday, but bounced with the stock market on Tuesday. Jack Fusco, chief executive, said on an earnings call last week: “I think the trade tensions and the tariffs are unproductive and create some added costs to our Chinese consumers. But as a company, we’re relatively insulated from the current future tariffs and we don’t expect any material impacts.”

Plants with a total of 34m tonnes per year of capacity were operating in the US as of December, with another 50m tonnes under construction and due for completion in 2019-20, the International Gas Union said. Almost 20 more have been proposed, “only a few” of which are likely to advance to a final investment decision, construction and operation, the group said.

Shares of Tellurian, a company whose Driftwood LNG terminal in Louisiana awaits a final investment decision, plunged almost 9 per cent on Monday before rebounding 4.4 per cent on Tuesday.

Charif Souki, Tellurian chairman, said: “China imposing tariffs on US LNG is a classic example of cutting off your nose to spite your face.”

Mr Souki, formerly chief executive of Cheniere, said the company was in advanced negotiations with groups including Total of France, Petronet of India and others in the Middle East.

“We welcome other investors yet we are very confident that we will reach FID [final investment decision] within the next few months with or without Chinese participants,” he said.