LNG Cheniere Energy Inc

By Christopher M. Matthews 

A new U.S.-China trade plan could be a boon for companies looking to export U.S. natural gas, and is already lifting Cheniere Energy Inc., the early mover in the nascent industry.

Shares of the Texas-based company, the only one to date to export liquefied natural gas from the lower 48 states, were up 3.2% in late trading Friday following overnight news of the trade plan. Cheniere's shares are up more than 40% over the past year.

Cheniere and others planning to export the natural gas that has become abundant in the U.S. because of shale drilling are hoping the trade plan represents a blessing from the Chinese government to open one of the world's fastest-growing import markets. China has thus far eschewed long-term supply deals with the U.S.

"The Chinese have had concerns about the U.S. honoring long-term contracts with a Chinese counterparty, so we're really pleased with the language that came out," Cheniere Chief Executive Jack Fusco said in an interview. "My aim is to try to finance our next round of growth and I would love to do it with a Chinese counterparty."

Cheniere has a first-mover advantage, owning the only operational export terminal on the U.S. Gulf Coast, and thus far has sent nine spot cargoes to China. But more than 30 others, including Exxon Mobil Co. and Tellurian Inc., are constructing or await regulatory approval for the billion-dollar export terminal facilities, which chill gas to a liquid state, making it more efficient to export.

U.S. exporters face competition from other gas-rich nations closer to China, and the preliminary 10-point bilateral trade plan, released by both governments Thursday, provided few concrete changes to boost gas trade. Still, Cheniere and its competitors believe a symbolic statement of support from Beijing will carry weight with the country's state-controlled energy companies, which handle most of China's gas imports.

Cheniere has had talks with Chinese counterparties as part of its ongoing efforts to attract new customers in Asia, according to Cheniere spokesman Eben Burnham-Snyder. Exporters prefer long-term deals, which are usually guaranteed, take-or-pay contracts for terms ranging from 10 to 20 years that help finance costly infrastructure projects.

China's gas imports have soared as the country attempts to wean itself off coal as part of an aggressive five-year plan to increase air quality. China imported more than 28 million tons of liquid gas in 2016, a 33% increase from the previous year, and is now the world's third-largest importer.

China has so far sourced relatively small amounts of liquid gas from the U.S., instead relying on countries such as Qatar, Australia and Malaysia for its supplies. According to a 2015 report by the U.S. Energy Information Administration, China sourced 34% of its liquid gas imports from Qatar and 19% from Australia. State-owned China National Petroleum Corp. also signed a 30-year, $400 billion contract in 2014 with Russia's Gazprom to build a pipeline and supply gas from fields in Siberia.

But changing market dynamics could make U.S. gas more attractive. The Australian government has imposed export restrictions, effective in July, which would force producers to boost domestic supply there before exporting, following a sharp increase in domestic prices. Uncertainty also hangs over the Siberian pipeline as Russia has been unable to settle on a route, delaying the project.

Meanwhile, U.S. gas prices are at historic lows. Chinese imports have averaged around $8.25 per million British thermal unit, according to Chinese customs data. The explosion of U.S. fracking activity has driven American gas prices down to around $3 per mmBtu -- a situation that is widely expected to persist given enormous reserves. Cheniere has said it can supply liquid gas to Asia from $7.5 to $8.5 per mmBtu from proposed expansion facilities, after factoring transportation costs.

The recently expanded Panama Canal has also significantly shortened the trip from the U.S. Gulf to China. Eight of the nine cargoes shipped from Cheniere's Sabine Pass Terminal in Louisiana passed through the Panama Canal, shaving as much as two weeks off traditional routes around the Horn of Africa or through the Suez Canal.

Not everyone is convinced Chinese importers will rush to sign up for long- term contracts with U.S. suppliers following Thursday's announcement.

"I might even argue that Chinese likely prefer being able to receive U.S. LNG without having long-term supply commitments as Chinese importers have multiple supplier countries to choose from," said Jane Nakano, a senior fellow at the Center for Strategic & International Studies.

Mr. Fusco concedes there are competitive challenges, particularly from China's neighbors who send gas via pipe, but believes an abundance of U.S. gas and Cheniere's business model make it competitive. He noted Cheniere allows customers to redirect unwanted cargoes and facilitates the transfer, unlike other liquid gas suppliers in Australia and other countries.

"I don't think you can ignore China and we're going to be extremely competitive there," Mr. Fusco said.

Write to Christopher M. Matthews at christopher.matthews@wsj.com

(END) Dow Jones Newswires

May 12, 2017 16:26 ET (20:26 GMT)

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