China Trade War Kneecaps US LNG
Without orders from the Chinese, gas companies can't convince banks their projects are viable
That the U.S. energy industry would be among those hardest hit by a full-blown trade war between Washington and Beijing was a no-brainer. Yet the extent of the fallout as the war continues is only becoming evident now, as some companies find it hard to secure the funding for their ambitious LNG projects.
According to the Bank of America Merrill Lynch, a number of companies may delay their final investment decisions on new LNG capacity to next year because of U.S.-Chinese trade tensions. Bloomberg reports these include Tellurian and NextDecade, as well as other companies focused exclusively on LNG.
“We see delays as likely given current pricing headwinds, no resolution yet on the U.S.-China trade war, and minimal contract announcements in recent months,” BofA analysts wrote in a recent note to clients, referring to Tellurian’s US$28-billion Driftwood LNG project in Louisiana.
While the companies themselves are not too talkative when it comes to possible obstacles to the so-called second wave of LNG projects in the U.S., the facts are not encouraging: China has imported no U.S. LNG since March, according to data from ClipperData. Bloomberg data is even gloomier: it suggests no U.S. LNG has made its way into China since February. No wonder, since Beijing first imposed a 10-percent tariff on the commodity and then upped this to 25 percent in retaliation for U.S. tariffs.
Yet there is another aspect of the trade war that is more damaging to U.S. LNG producers. To secure funding for these projects that typically cost billions, U.S. companies need long-term commitments to convince banks the projects are viable. Chinese buyers were the natural choice for these long-term commitments but this is no longer the case as Chinese investors shun U.S. projects amid the war.
To add insult to injury, the gas price context is increasingly unfavourable and could add justification to delays in final investment decisions. U.S. energy companies are producing too much gas at a time when domestic demand is stalling and global demand is being met by a growing number of countries. [Russia.] LNG projects are also suffering the effects of low gas prices. As RBC recently forecast, this year, the natural gas market will remain oversupplied, and this oversupply will extend into 2020 as well.
U.S. LNG exports were hailed as a double blessing: on the one hand, expanding U.S. companies global presence on the LNG market and on the other, relieving a persistent natural gas glut resulting from the growth of the shale oil and gas industry. The size of this relief grew from just 2.92 billion cu ft in 2013 to 1,083 billion cu ft last year. Now, its further growth that could turn the United States into the world’s top LNG exporter by 2024 is under threat.
Meanwhile, Big Oil majors, which are a lot more resilient to any single segment of the energy industry, are forging ahead with their own LNG projects outside the U.S. Mozambique is a hot spot and so is Papua New Guinea. They are adding capacity that would ultimately compete for market share with U.S. independents. That’s just one more headache-generating problem for these independents to deal with.