Corporate Debt Review

Prospects for US-China Energy Trade Diminish

The Power of Siberia

Last week, Chinese national oil company PetroChina inked a major liquefied natural gas (LNG) import deal from Qatar, the world’s largest LNG exporter. The 22-year contract calls for 3.4 million tons annually. In addition, there was much speculation surrounding Chinese-Russian energy agreements arising from the Eastern Economic Forum in Vladivostok.

As I write this, there remains much smoke but no substance on suggestions that a breakthrough bilateral energy partnership is emerging between Moscow and Beijing. True, there was an announcement of developments on the so-called “Power of Siberia” natural gas pipeline, but that project has been underway for years (it was finalized in 2014), while the update announced last week merely confirmed what was already known about the progress in the line. It is about 93% complete and should start sending gas to both Eastern Siberian settlements in Russia and across the border to China at the end of next year.

About 38 billion cubic meters annually is anticipated on the already agreed-to Power of Siberia “eastern route.” Last week, indications emerged that Moscow would be seeking expedited approval for some 30 billion cubic meters a year on the proposed “western route” of what would be a dual-piped Russian export venue.

However, there are no tangible indications the stumbling blocks delaying the initial route have been overcome. These include what China actually pays for the gas, how much volume it must commit to on the take-or-pay provisions of the Gazprom contract, and whether there will be a clause in the contract allowing for revisions based on changing market conditions.

This latter point becomes more central as the amount of LNG imported into China continues to mount. Beijing now has a significant amount of leverage in offsetting pipeline gas and LNG moving forward. It is already on track to become the leading global importer of natural gas by next year.

However, the largest loser in all of this is the US. That’s because the other major Chinese-related trade story to hit last week was the threat of at least another $200 billion in trade tariffs coming from the White House and aimed at China. As I have noted here previously in ECRG Intelligence, any Chinese response will require tariffs on all imported US energy products – crude oil, refined oil products, and LNG.

The Bargaining Power of Beijing

As of this morning (September 17), I have received several “heads up” from Chinese contacts that-should Trump deliver on the next round of US tariffs against Chinese goods exported to the American market-Beijing will move away from medium to longer-term US agreements.

US LNG had been considered a likely addition to the Chinese energy import policy, as it moves to offset what officials considered to be overly heavy dependence on Russia, and also begins to allow for forward hedging on deliveries. China currently has the largest amount of available LNG terminal import capacity worldwide, and Beijing had intended to utilize capacity to negotiate better long-term delivery pricing, augmented by contract swaps to maximize regional cost differentials.

But that is now less likely. The Qatari deal announced last week is likely to be matched by smaller LNG consignments from both Russia and Australia. A breakthrough is possible in combining upstream Chinese investment with guaranteed discounted export flow. That is focusing on Iranian projects (if they move forward in the teeth of separate US sanctions against Teheran) and similar arrangements in North Africa.

Nonetheless, even if successful, neither of these is going to have an impact on trade flows very quickly. For the foreseeable future, China will continue playing providers against each other.

Current contracts, such as the 20-year agreement Cheniere Energy has for the export of US LNG to China, will not be impacted by any White House tariff action. And while my sources also indicate that Beijing will be prepared to negotiate with Washington, the latest threats by Trump are making it more difficult for US LNG export interests.

The Power of Trump’s Tariffs

It is hardly rocket science at this point. Multi-year contracts are more difficult to negotiate if the counterparties lack confidence in US policy objectives. As one contact having direct involvement in the Chinese response confided to me over the weekend, “At some point, continuing to include the Americans in the [energy import] mix just becomes too much of a risk. Continuing belief that ongoing US-Chinese trade talks can rescue US LNG exports and confidence that American domestic politics can be offset by genuine market need are both declining.”

With the network of non-US suppliers firming up, American LNG exporters are looking at a White House-inspired threat to company bottom lines. China had been thought to be the primary driving force behind rising US LNG exports through the next decade. That is now genuinely at risk.

But the problems hardly end there. On several occasions last week, sources in LNG and energy trade elsewhere were talking about a widening backlash to, as one put it to me, “the Trump tariff follies.”

The US is now regarded in other parts of the world (that is, beyond China) as a less secure source of oil and LNG import volume. A Swiss oil and natural trader has confided that, “The perception is becoming widespread that one believes Washington’s trade policies at face value at one’s peril. The volatility caused by each presidential tweet is unacceptable.” Another London market veteran, in an unusually long telephone conversation yesterday (Sunday, September 16), bluntly concluded: “The US president is using trade as a way to distract from his own internal political and legal problems. The market has no time for such a self-serving tantrum.”

If the next round of US tariffs against China is put in place, Beijing will have to include American energy exports on the reprisal list. I have already noted in earlier writings here that this will increase domestic energy prices in China.

But we can now also conclude it will have a negative impact on US energy exports back home.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.