Despite harsh campaign rhetoric, including accusations of currency manipulation, the Trump Administration's recent trade deal with China represents a shift toward improving relations. One big winner from the deal is American energy exports, particularly liquefied natural gas.
Despite garnering some mixed feelings following its announcement last week, the deal has been hailed as an opportunity to dramatically expand U.S. access to one of the biggest energy export markets in the world. It could mark the turning point for U.S. LNG production and an American future as a major energy exporter, a future which is widely anticipated as American production of oil and natural gas continues to grow.
The actual article of the recent trade deal referring to energy exports is rather vague, amounting to a 100-day action plan. It invites Chinese companies to negotiate long-term contracts for LNG shipments from American suppliers. The invitation is nevertheless a clear indication that China can obtain favorable terms from U.S. companies, and Wood Mackenzie estimates Chinese demand could amount to $26 billion a year by 2030.
China already is the number one buyer of American crude oil. In February, Chinese purchases of imported U.S. light crude surpassed Canada, hitherto the chief consumer of U.S. crude oil exports.
Yet much of the new U.S. product destined for China under the new deal would be LNG, which for now is exported from Cheniere's (NYSEMKT:LNG) Sabine Pass export terminal. China has grown into a major LNG export market. In 2016, the country imported 26.1 million tons of LNG, a 32.6 percent year on year increase, according to IHS. WoodMac believes Chinese demand will triple by 2030, reaching 75 million tons a year, as the country's economy attempts to shift away from relying on coal and domestic oil and natural gas production continues to decline.
Right now, China depends on Australia and Qatar for 65 percent of its LNG imports. Only a few U.S. cargoes made it to China last year, amounting to 1 percent of total imports. The new deal constitutes an opportunity for U.S. suppliers to increase their stake in China. And the market took note: shares in Cheniere, currently the country's only LNG exporter, rose by 3.3 percent after the deal was announced. The deal is a vague acknowledgement of greater cooperation on trade: it doesn't stipulate anything specific. American companies will have to approve long-term contracts with Chinese importers or sell on the spot-market as Cheniere has done. Bargaining with the Chinese, currently being wooed by Malaysia, Qatar, Australia, Iran and other potential LNG suppliers, may be difficult.
There's also China's other economic initiative, the Belt and Road program, which anticipates enormous infrastructure and trade expansion throughout Eurasia, and includes billions in pledged development spending. The plan is being touted as China's effort at realizing its role as a potential global leader, a clear message that it seeks to supplant the United States. American complicity in China's expansion, coming in the form of providing for China's domestic energy needs, could have complications for U.S. foreign policy, which still confronts China's ambitions in the South China Sea and its perceived aggression against traditional U.S. allies like Japan and the Philippines.
These geopolitical concerns bubble beneath the surface, but for U.S. energy exports the enthusiasm is there and the deal represents a major opportunity to access the world's fastest-growing LNG market. Nevertheless, it will be a struggle to realize the deal's potential. Major increases in global supply, including the United States, has created an LNG glut. Current major market players like Qatar, Australia and Malaysia are well positioned to feed East Asian LNG demand, while consumers in Japan, South Korea and Taiwan signaled this year they are prepared to radically overhaul the ways in which LNG is sold worldwide, allowing for more flexibility. WoodMac's estimates of U.S. LNG growth potential depend heavily on American competitiveness vis-à-vis regional suppliers.
Four new export terminals are under construction in the U.S. and are slated to come on line in 2021, while many more have been proposed and are awaiting approval. Yet the successful mass export of LNG will require increased investment in infrastructure, particularly pipelines, and higher prices. The current glut in LNG supply isn't expected to fall away until after 2020, with new supply capacity exceeding demand by as much as 50 percent.
There is strong political and economic appeal to embrace LNG exports: it could raise prices, support U.S. allies in East Asia, provide jobs and prosperity to the U.S. economy and support a global transition from coal-firing to gas-firing power plants for electricity generation. This would support the argument that the Trump Administration, which already has indicated its friendliness to the U.S. energy sector and its desire to support energy production, is determined to support U.S. LNG sales abroad, particularly when it can help ease tensions with China, arguably the most important geopolitical player.
The deal is certainly good politics and an encouraging sign for advocates of increased U.S. energy exports. But realizing its potential will depend just as much on changes in the market as it will on government policy, despite the clear benefits for the U.S. energy sector.
By Gregory Brew for Oilprice.com
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