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Can US LNG Compete With Qatar and Australia

Last week, the LNG world was a buzz with news that the U.S. had finally agreed to export LNG to China based on the May 11, 2017 announcement by the U.S. Commerce Department of a U.S.-China 100-Day Action Plan. Is this a big deal or not?

China is the Largest LNG Growth Market

There’s no question that the Chinese energy market is a very big deal overall and that China is the largest LNG growth market. According to the U.S. EIA, five Asian countries (Japan, South Korea, China, India, and Taiwan) accounted for 68 percent of global LNG imports in 2015. In 2016, higher imports into China and India more than offset declines in LNG consumption in the established markets of Japan and South Korea. In the coming years, it is expected that more U.S. LNG will find its way to Asia via the expanded Panama Canal, which reduces shipping costs and travel time between the Atlantic and Pacific basins.

Leading energy consultancy Wood Mackenzie is also bullish on Chinese LNG demand, noting, “By 2030, we expect Chinese LNG demand to reach 75 mmtpa, triple 2016 imports. This is equivalent to $26bn a year at today’s prices ($7/mmBtu), and the U.S. is keen for a slice of the pie.”

Does the U.S.-China 100-day Action Plan Change U.S. LNG Export Law?

What’s less of a big deal is the actual impact of the Commerce Department’s statement, which reads:

4. The United States welcomes China, as well as any of our trading partners, to receive imports of LNG from the United States. The United States treats China no less favorably than other non-FTA trade partners with regard to LNG export authorizations. Companies from China may proceed at any time to negotiate all types of contractual arrangement with U.S. LNG exporters, including long-term contracts, subject to the commercial considerations of the parties. As of April 25, 2017, the U.S. Department of Energy had authorized 19.2 billion cubic feet per day of natural gas exports to non-FTA countries.

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This statement merely reiterates current U.S. law, which allows LNG exports to countries with whom the U.S. does NOT have a free trade agreement (so called non-FTA), countries on a non-discriminatory basis, subject to a “public interest” analysis and approval by the U.S. Department of Energy (DOE). Since the U.S. does not have an FTA with China, China is a non-FTA country and is free to negotiate LNG export deals with U.S. LNG exporters “no less favorably than other non-FTA trade partners.”

A Policy Shift In Favor of U.S. LNG Exports

While the 100-Day Action Plan statement does not reflect any change in law that would make it easier to export U.S. LNG to China, it does reflect a change in U.S. policy to actively promote U.S. LNG exports to any country, including China, that wants to buy U.S. LNG. Under President Obama, U.S. LNG export policy was less clear as the Obama administration struggled to weigh the impact U.S. LNG exports could have on domestic natural gas prices.

While there was not an official policy against U.S. exports to China, there were rumors that the Obama Administration had discouraged U.S. LNG exporters from signing deals to China for political reasons. According to Freeport LNG, when U.S. LNG exports were first proposed, there was interest from Chinese companies but the DOE cautioned Freeport that dealing with Chinese investors could create a political issue.

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Whether for political or commercial reasons, Chinese counterparties are not offtakers of any U.S. LNG export project under construction. Regardless of past U.S. policy, it is now clear that Chinese buyers are welcome to sign deals with current or future U.S. LNG exporters. It also appears that concerns about the impact U.S. LNG exports would have on the domestic price of natural gas have been abated with Commerce Secretary Wilbur Ross indicating that officials from Dow Chemical “gave assurances that increasing exports of natural gas wouldn’t harm the U.S. industry or consumers if sales remained less than 30 percent of total output.”

The U.S. Has Already Exported LNG to China

It should be noted that the lack of direct offtake agreements has not limited China’s ability to get U.S. LNG. In August 2016, Cheniere shipped a U.S. LNG cargo to China via Royal Dutch Shell’s Maran Gas Apollonia. This was noteworthy since it was the first LNG tanker to transit the expanded Panama Canal, which will ease access to Asian markets for U.S. LNG exporters.

According to the most recent LNG export report from the U.S. DOE, as of March 2017, Cheniere has shipped 10 LNG cargoes to China. In a recent presentation, Cheniere reported that since 2016, it has shipped more than 100 cargoes to 20 countries.

Recent reports indicate that Cheniere is looking to line up new LNG export deals with Reuter’s reporting that Cheniere has had “extensive negotiations with China” over the past month. In comments to the Wall Street Journal, Cheniere CEO, Jack Fusco voiced support for the 100-Day Action Plan noting, “The Chinese have had concerns about the U.S. honoring long-term contracts with a Chinese counterparty, so we’re really pleased with the language that came out. My aim is to try to finance our next round of growth and I would love to do it with a Chinese counterparty.”

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U..S LNG Exports to China – A Big Deal or Not?

So far, Cheniere’s Sabine Pass LNG terminal is the only terminal exporting U.S. LNG. In the next few years, several more U.S. LNG export projects will come online with many more projects proposed and at various stages of development.

The next wave of U.S. LNG export projects will need firm offtake commitments in order to advance. While U.S. LNG exporters like Cheniere seem eager to embrace Chinese counterparties, market forces in the rapidly evolving global gas and LNG markets will ultimately determine the volume of exports that go to China. U.S. LNG will need to be competitive with other suppliers, most notably Qatar and Australia, and will also depend on whether Chinese buyers want exposure to U.S. gas prices. Another wildcard is whether Americans will embrace the idea of U.S. LNG exports to China, or will this become a political issue again as more and more natural gas leaves American shores? Regardless of the outcome, U.S. LNG exports to China could indeed be a very big deal.

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