Experts: China tariffs will wound US natural gas industry, but not mortally

Author: Washington Examiner - September 20, 2018 - Updated: October 8, 2018

A drilling rig at night. (iStock/Getty Images)

By Josh Siegel, Washington Examiner

China’s new tariffs on American liquefied natural gas will hurt the industry, but ultimately may only hinder rather than halt the progress of a growing industry that is a key plank of the Trump administration’s “energy dominance agenda,” experts say.

China has represented the best opportunity for the U.S. to flood the world with cheap liquefied natural gas, known as LNG, because it is the largest growth market as the country seeks to wean off its heavy use of coal that harms air quality.

LNG is the chilled, liquid form to which gas must be converted for shipment in giant tanker vessels across the sea.

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But beginning next month, American gas will be more expensive, after China’s Finance Ministry said Tuesday that it is imposing a 10 percent tariff on American LNG as part of $60 billion in tariffs on U.S. goods in response to President Donald Trump’s latest round of tariffs.

The penalty is not as severe as the 25 percent tariff on LNG that China threatened in August, but it still matters, experts say.

“The 10 percent tariff puts U.S. LNG at a competitive disadvantage in China when compared to LNG from elsewhere that seeks to sell to the growing market,” Edward Chow, a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies, told the Washington Examiner.

Industry officials, meanwhile, warn that Trump’s trade war with China is threatening to discourage the world’s fastest growing LNG market from signing long-term contracts with American developers.

Whereas oil is fungible, buyers of LNG demand long-term contracts, in the 20-year range.

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Other countries, including Russia, Qatar, Canada, and Mozambique can offer LNG at competitive rates, despite the U.S.’ currently cheap prices. Just last week, PetroChina, a Chinese oil and gas company, signed a 22-year agreement to buy 3.4 million metric tons of LNG annually from QatarGas.

“These tariffs have the power to price U.S. LNG out of the Chinese market,” said Charlie Riedl, the executive director of the Center for Liquefied Natural Gas, a nonprofit trade group. “Pricing U.S. LNG out of a key market undermines its competitiveness and ability to reduce the U.S. trade deficit while providing good jobs at home and growing the economy.”

The short-term impact of the tariff is likely to be muted, experts say. As the U.S-China trade dispute escalated, Chinese buyers have been gradually reducing purchases of American LNG.

China has already completed the majority of its procurement of gas for the winter, noted Giles Farrer, a research director at Wood Mackenzie.

Chow says Trump’s broader trade agenda represents a bigger threat, however. His steel tariffs increase the cost of building new LNG terminals, just like they have for oil and gas pipelines. The U.S. has only two operating LNG export terminals, but many more are planned, and in the process of seeking regulatory approval. Investors may hesitate to finance these planned projects if there are fewer long-term contracts to buy gas.

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“The most important damage the trade war does to the U.S. LNG industry is not in short-term sales,” Chow said. “U.S. is earning a reputation as an unreliable trading partner, not only with China.”

The U.S. Geological Survey says recent discoveries show Colorado might have the nation’s second-largest natural gas reserves, most of it lying untapped in the Piceance Basin in the state’s northwest corner. Economic development plans call for the gas to supply the U.S. market and to provide exports to Asian countries.

Jane Nakano, also a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies, says the Trump administration seems to be betting that the U.S. dominant energy position gives it leverage in trade disputes.

Drilling in shale fields over the last decade has unlocked massive new sources of gas, far more than the U.S. consumes. As a result, America has become a net exporter of natural gas. It also recently passed Saudi Arabia and Russia to become the world’s biggest crude oil producer.

“We are operating under a very different assumption,” Nakano told the Washington Examiner. “In that sense, perhaps this White House feels they can afford to unroll stuff like tariffs that could adversely impact the U.S. oil and gas industry. If we were still living with an energy-scarce mentality, that may have been a no-go.”

Nakano says she expects the U.S. and China to resolve its LNG trade dispute, and resume working together on long-term projects, because it would harm both countries if not.

China’s demand for LNG is soaring, and it is relying more on the U.S., becoming the third-largest destination for American gas behind Mexico and South Korea. Chinese imports of U.S. LNG increased from zero in 2015 to 17 billion cubic feet in 2016, to 103 billion cubic feet last year.

“LNG trade is a win-win between the U.S. and China,” Nakano said. “These deals will eventually happen because there is a strong commercial rationale to the two sides working together.”

U.S. LNG company Tellurian is also downplaying the impact of China’s tariffs.

“Over time, the trade issues will work themselves out, and we expect the Chinese market to continue growing,” said Tellurian President and CEO Meg Gentle.

Colorado Politics contributed.

Washington Examiner

Washington Examiner