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Trade war : how China is striking back

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Trade war : how China is striking back

ExxonMobil (XOM) and other American energy companies are racing to build more than two dozen expensive facilities to export liquefied natural gas, which is super-cooled natural gas that can be transported by ship.

China even marked President Donald Trump’s visit to Beijing last
fall by agreeing to invest as much as $43 billion into an LNG project in
Alaska.

But
this pairing of an able buyer and well-supplied seller no longer
looks like a slam dunk. As part of the escalating trade war, China on
Tuesday said it will impose a 10% tariff on $60 billion of US products —
including LNG.

The
trade tensions could make it more difficult for the next wave of LNG
export facilities to get the financing needed to get off the ground.

“It’s
obviously very concerning. The potential for some projects to get delayed is
very real,” said Charlie Riedl, executive director of the Center for
Liquefied Natural Gas, a trade group that represents Exxon, Chevron (CVX)and
other energy companies.

The
shale boom created an excess of natural gas in the United States. In a bid
to get rid of the glut, the United States began exporting LNG in 2016 when
Houston-based Cheniere (LNG) opened the Sabine Pass terminal in
Louisiana. Earlier this year, Dominion
Energy (D) opened
Cove Point in Maryland, the nation’s second export facility .

China
is the big elephant in the room. China’s appetite for LNG is growing rapidly.
And it’s on the verge of
overtaking Japan as the biggest buyer of LNG in the world.

That’s
one major reason why the United States is planning to quadruple its export
capacity by building at least 25 new facilities. LNG is a centerpiece of
Trump’s energy dominance agenda.

In
the 12 months leading up until June 2018, China was the second-largest buyer of
US LNG, according to energy consulting firm Wood Mackenzie. Shell, the US
subsidiary of Royal Dutch Shell (RDSA), was the largest seller.

However,
China has dialed back its US LNG purchases in recent months as trade tensions
have ratcheted up, according to ClipperData. Beijing is instead turning more to
LNG powerhouses Qatar, Australia and Russia.

“China
has been able to find willing sellers closer to its own backyard,” said Matt
Smith, ClipperData’s director of commodity research.

Now,
the tariffs will likely price US LNG out of the Chinese market, according to
S&P Global Platts.

“There are other suppliers around the world that would gladly supply China  and they don’t have a 10% tariff,” said Riedl.

Kyle
Isakower, vice president for economic policy at the American Petroleum
Institute, said in a statement that the trade situation “works against US
energy sector growth and counter to the administration’s stated goal of ‘energy
dominance.'”

Threats

The
good news is that China had threatened an even bigger tariff — 25% — on US
LNG. Cheniere’s share price rallied 2% on Tuesday in response to the lower-than-feared rate.

In
any case, analysts don’t believe that overall US LNG exports will be
dramatically hurt in the short run. There are plenty of other buyers, including
Japan, South Korea, Taiwan and Latin America. And Washington has been pushing
Europe to break its addiction to natural gas from Russia.

“If
China buys less, someone else will buy more,” said Pavel Molchanov, an
energy analyst at Raymond James. “It doesn’t matter if it’s a Chinese
buyer, a European buyer or a Latin American buyer. Revenue is revenue.”

The
real fallout of the US-China trade war could be felt in that next wave of LNG
projects that’s in the works. Due to the enormous cost to build each facility,
financing hinges on the ability to sign a long-term buyer to a contract. And
the obvious buyer had been China. Until now, that is.

For
instance, Cheniere announced plans in May to expand its Corpus
Christi export terminal in Texas. The expansion was backstopped in part by a
contract with PetroChina (PTR).

Cheniere
did not respond to a request for comment on the impact of the tariffs from
China.

In
August, Cheniere CEO Jack Fusco told analysts that threatened tariffs from
China may slow down talks with counterparts in China about future growth.

However,
Fusco said that the tariffs won’t impact existing contracts. And he emphasized
that the US-China energy relationship has been beneficial to both sides,
including by creating thousands of direct and indirect American jobs. “China
is an important growth market for Cheniere,” Fusco said. “We expect
to sell meaningful amounts of LNG into China over the long term.”

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