By Georgi Kantchev and Christopher M. Matthews
China's move to impose tariffs on U.S. liquefied natural gas
imperils the ability of a burgeoning industry to export the bounty
of American shale.
Retaliating against new Trump administration tariffs on $200
billion in Chinese goods, China on Tuesday issued levies on $60
billion of U.S. products, including a 10% tariff on liquefied
natural gas, known as LNG.
Shares of Cheniere Energy Inc., the first U.S. company to export
LNG from the U.S. Gulf Coast, rose on the news, as the tariff was
lower than a 25% levy China had earlier threatened. Still, the
tariff is bound to have an impact on American LNG exporters,
analysts said, making them a potential early victim in the
escalating trade battle between the U.S. and China.
China is the biggest source of new global LNG demand as the
country steps up efforts to combat air pollution by shifting from
coal-powered plants to natural gas and renewable energy sources.
The U.S., which is emerging as a powerhouse in the global gas
trade, was expected to mop up a big chunk of that demand.
But tariffs may now hamstring American companies as they
negotiate for long-term contracts, experts said. Fewer long-term
contracts could help stall a planned wave of new export terminal
projects in the U.S. Numerous countries are competing with the U.S.
as gas becomes a more globally traded commodity, including
Australia, Qatar and Russia.
"It's a big deal for the U.S.-China gas trade," said Ira Joseph,
head of gas and power analytics at S&P Global Platts. "The
tariffs will push Chinese buyers to other sellers in Asia and the
Middle East because the U.S. will no longer be considered a low
cost option."
"The U.S. now can't come in with lowball price deals," he
said.
An October U.S. LNG cargo out of Sabine Pass, La., fetches $9.04
per million British thermal units in Guandong Dapeng, China,
according to S&P Global Platts Analytics. By comparison, a
Qatari cargo to Guandong Dapeng goes for $10.48 per million British
thermal units. A 10% tariff would make the U.S. price less
competitive.
Trevor Sikorski, head of natural gas research at consultancy
Energy Aspects, said that the tit-for-tat tariff moves could derail
some proposed new export terminals in the U.S.
"Long-term implication is Chinese money is likely to look to
countries they feel they can rely on for gas supply -- and that is
good news for most of the new non-U.S. LNG projects," he said. "The
biggest loser in all this is proposed U.S. LNG" infrastructure.
U.S. oil and gas producers have been eagerly awaiting new export
projects, which would create new demand to eat into a glut of
natural gas that has kept the U.S. benchmark price below $4 per
million British thermal units for years. Natural-gas futures for
October delivery were trading Tuesday at around $2.88 a million
British thermal units on the New York Mercantile Exchange.
More than a dozen projects are awaiting regulatory approval in
the U.S., though analysts say only a handful are likely to be
greenlighted before the end of 2019. If Chinese buyers become less
willing to buy U.S. LNG, it could be more difficult for U.S. LNG
exporters to finance the projects, which cost billions of dollars
each to build.
The tariff tussle could also cloud the prospects for long-term
contracts, which are common in the industry. A number of legacy
contracts are due to expire in the next few years, creating an
opportunity for U.S. producers.
Cheniere signed two large supply agreements with China National
Petroleum Corp. in February that run through 2043. But such
long-term deals, favored by suppliers in part because they help
finance expensive liquefaction facilities, may be imperiled by the
new tariffs, according to analysts.
Producers like Qatar have significant volumes of unsold LNG
emerging in the 2020s, meaning any wrinkle in the trade could
provide an opportunity for U.S. competitors. Last week, Qatargas
said it had agreed on a 22-year deal with PetroChina International
Co.
"It looks highly unlikely any Chinese firm will be looking to
sign up to long-term U.S. LNG contracts," Mr. Sikorski said.
Still, the fact that the tariffs were lower than China had
threatened was welcomed by some investors, analysts said.
Cheniere's shares rose more than 2% Tuesday, and shares of
fledgling exporter Tellurian Inc. also rose. Cheniere declined to
comment Tuesday.
"Over time the trade issues will work themselves out and we
expect the Chinese market to continue growing," said Tellurian
Chief Executive Meg Gentle.
Katie Bays, an analyst at Height Securities LLC, said the rise
in Cheniere's share price reflected Chinese buyers' reliance on the
spot LNG cargo market, of which U.S. supply makes up about 25%.
Chinese companies had already purchased spot U.S. cargoes ahead of
winter, and a steeper tariff would have been punitive to them, she
said.
"Backing the tariff percentage off from 25% to 10% was a signal
to the market that China was acknowledging how dependent they are
on imported LNG, and imported U.S. LNG," Ms. Bays said.
Write to Georgi Kantchev at georgi.kantchev@wsj.com and
Christopher M. Matthews at christopher.matthews@wsj.com
(END) Dow Jones Newswires
September 18, 2018 16:45 ET (20:45 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.