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May
20
2017

Trump-Xi Deal Could Fuel A U.S. LNG Boom
Irina Slav

When President Trump came into office, he openly resented the major trade deficit with Asia’s number-two economy and vowed to remedy the situation. While his words smacked of economic protectionism to many, the latest news about China-U.S. economic relations reveal a different picture.

While back in February the U.S. president talked about trade wars, last week he and Xi Jinping struck a deal that would see China receive more U.S. natural gas, as well as additional beef and poultry.

This week, the chairman of the China National Petroleum Corp., the largest state energy company, told Bloomberg in an interview that CNPC would gladly boost its U.S. oil and LNG imports. “The U.S. has very rich oil and gas resources, and as China pursues a diversification of its crude supply the U.S. will of course be one of the sources. We will consider exploring cooperation in areas such as jointly developing liquefied natural gas facilities and gas transport,”Wang Yilin said.

China can certainly do with the diversification, as its energy needs are growing inexorably. It is already the biggest buyer of U.S. crude, ahead of Canada, importing a total of 8.08 million barrels of oil in February. China imports this much oil on a daily basis, so in the scheme of things, US oil imports are a relatively small portion of the overall, based on China’s average daily import rate for the same month, but this figure will certainly grow with Beijing’s diversification drive.

The news is even better for U.S. gas. When the Trump-Xi deal was announced, shares in Cheniere Energy, currently the only LNG exporter in the country, jumped by 3.3 percent. The trade deal will likely provide a major boost for other LNG export hopefuls, too. However, not all will be easy.

First, China’s diversification is not necessarily focused only on the U.S. On the contrary, Beijing is unlikely to succumb to overreliance on one single source of energy. What’s more, U.S. LNG may find it tough to compete with supply from Australia and Qatar. All that without even mentioning the Power of Siberia gas pipeline that will see China import 38 billion cu m of gas annually, starting in 2025, strengthening ties between Beijing and Moscow.

In a recent report, the CNBC quoted analysts as suggesting the competition may prove too stiff. “China is much nearer and much cheaper to ship from Australia, for example, or Qatar,” said S&P Platts’ regional director for energy pricing, Alan Banniser. According to him, Europe is the most logical market for U.S. gas.

Wood Mackenzie’s Massimo Di-Odoardo, for his part, told the CNBC that the trade deal put the U.S. in a position to benefit from gas import growth to the tune of US$26 billion annually but he, too, was cautious, adding that this “will depend on its competitiveness versus other global alternatives and Chinese buyer appetite for exposure to U.S. gas prices.”

The average price per thousand cu ft of U.S. LNG in February was US$5.99, up from a trough of US$3.65 per 1,000 cu ft reached in October 2016 but much lower than the US$16.67 from November 2015. Prices fell sharply between November 2015 and February 2016 as a lot of new supply came online and a glut ensued.

The glut is still here, and there is no gas-related OPEC to try and do anything about it, so prices are bound to stay low for a while longer. For how long, it is difficult to say. The good news is that demand for LNG will grow – according to Shell’s first ever LNG Outlook, by 4-5 percent annually until 2030. Capturing a piece of the Chinese market may be a challenge but the rewards to be reaped sure look like it’s worth it.

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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