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Irina Slav

Irina Slav

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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How Chinese Tariffs Will Hurt U.S. LNG

LNG vessel

“It’s not a big deal,” Tellurian founder Charif Souki recently told CNBC’s Jim Cramer when asked about the danger of China slapping 25-percent tariffs on U.S. LNG. "If they impose tariffs on American gas, all that means is we'll receive different gas," Souki added. This may be good for Tellurian, but here’s a question: how is this good for the U.S. LNG industry as a whole?

“We have the cheapest gas in the world,” Souki said during his chat with Cramer. This might be true but the LNG market is dynamic like all other commodity markets. Besides, a 25-percent tariff on “the cheapest gas in the world” will certainly change its status as the cheapest. It would also throw a wrench in U.S. LNG producers’—Tellurian’s included—plans to boost their production capacity.

Here’s what one analyst said earlier this month in a note, as quoted by CNBC. Chinese tariffs "would deal a serious blow to the U.S. gas industry and President (Donald) Trump's 'energy dominance' agenda," Hugo Brennan from Verisk Maplecroft said. He went on to elaborate: “Chinese gas demand forecasts are underpinning a raft of proposed LNG export terminals along America's East Coast, which align with the Trump administration's bid to turn the U.S. into an energy superpower. But some of these projects will struggle to attract financing if (China) goes ahead and raises tariff barriers on U.S. LNG."

Tellurian is one of the companies planning more liquefaction capacity. Earlier this month Reuters reported that the company would soon announce the list of its financing partners for the US$27.5-billion Driftwood project, which will have a capacity to produce 27.6 million tons of LNG annually. The deal Tellurian is offering to its potential partners is for a piece of everything: from LNG production to pipeline infrastructure. Related: The Consequences Of Surging U.S. Natural Gas Exports To Mexico

Now, China is the world’s second-largest LNG importer globally, and regardless of Tellurian’s founder’s upbeat attitude, it is already reducing LNG imports from the United States. As per a Reuters report from the end of July based on cargo-tracking and port data, China received only two cargoes of U.S. LNG in July, of 130,000 tons of LNG. The amount was equal to China’s intake of U.S. LNG in the previous month.

Meanwhile, Australia’s LNG exports to China have been rising, hitting 12.4 million tons over the first seven months of 2018. That’s up from 9.1 million tons a year earlier. The country has also increased its LNG shipments to Japan, the world’s top LNG importer. It’s worth noting here that two more megaprojects off the Australian coast will start producing this year: Ichthys, which already began operation, and Shell’s Prelude.

Here’s more from the analysts. Morningstar director of power and gas research Matthew Hong said last week that if U.S. Chinese negotiations failed, “In the short term, US producers and exporters may be shut out of the second-largest market for LNG, especially going into the high-demand winter months. In the long term, a prolonged conflict could delay final investment decisions on second-wave LNG projects, forcing US suppliers to miss out on what is expected to be a tighter market in 2020.” Related: Natural Gas Inventories “Dangerously Low"

If you only trade in LNG, then sure, tariffs will not be a problem: you could just get your LNG from somewhere cheaper. But if you plan to build more than 60 million tons of production capacity that may well need Chinese money to go ahead, the tariff news might turn into a pretty big deal.

China threatened to slap a 25-percent tariff on U.S. goods worth US$60 billion in response to President Trump’s latest suggestion of either 10 percent or 25 percent tariffs on US$200 billion worth of Chinese goods. The energy industry is definitely keeping its fingers crossed that talks will lead to some agreement after China imposed tariffs on U.S. oil product imports.

By Irina Slav for Oilprice.com

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  • Mamdouh G Salameh on August 27 2018 said:
    This year China overtook South Korea to become the world’s largest importer of LNG after Japan. It is projected that by 2020 China could emerge as the world’s biggest consumer of LNG.

    Chinese tariffs on US LNG imports will undermine US LNG export drive and will also throw a wrench in US LNG producers’ plans to build more than 60 million tons of production capacity.

    There are two major LNG markets in the world: the Asia-Pacific region and the European Union (EU).

    China is already reducing LNG imports from the United States. And if the trade war between the two countries escalates further, China may decide to stop buying US LNG altogether and buy instead more Russian LNG from the Yamal project and also from Qatar and Australia. Australia’s LNG exports to China have been rising, hitting 12.4 million tons (mt) over the first seven months of 2018. That’s up from 9.1 a year earlier. It’s worth noting here that two more megaprojects off the Australian coast will start producing this year: Ichthys, which already began operation, and Shell’s Prelude.

    In the long term, a prolonged trade conflict between China and the US could delay final investment decisions on second-wave LNG projects, forcing US suppliers to miss out on what is expected to be a tighter market in 2020.

    The other major LNG market is the EU. Europe’s LNG imports have surged 16% from 40.9 mt in 2016 to 47.4 mt in 2017 to become the third largest source of gas supply after Russia and Norway. The re-emergence of Europe as a major LNG market came after years of coal and nuclear power plant retirements as well as steep declines in Europe's largest onshore natural gas field in the Netherlands.

    Europe’s hub prices are already nearing the Asian LNG price level--the world’s premium gas market and highest global price benchmark.

    And although US LNG exports to the EU almost doubled in 2017, Europe has not yet proved to be the destination of choice for the US producers.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • alex on August 27 2018 said:
    Cheap energy is the root of industrial efficiency and a source of wealth. Chinese peasants are destined to be poorer. Someone else will buy US LNG and produce the wealth.
  • Barrett on August 28 2018 said:
    Regarding, “a prolonged conflict could delay final investment decisions on second-wave LNG projects, forcing US suppliers to miss out on what is expected to be a tighter market in 2020.”

    7 Trains are expected to be in service by Mid/Late ‘19 for ‘20. An 8th Train is 30% complete and expected to be in service in ‘21, possibly ‘22 but Mgmt & the EPC contractors have a strong track record of beating scheduked start dates.

    If an FID on T9 was contracted today, it would take 3-4 years to build T9, buy historical standards. Therefore, T9 is incapable of being completed by ‘20 in the first place. The Tariffs could easily make new US based export projects less economical and financeable from their bankers standpoint but there is no way for Cheniere to build a new project to be in service to supply for a tighter market in ‘20. Cheniere is lucky to have all 7 Trains Operational for ‘20 and Train 8 Operational, hopefully, by early ‘21.

    Not quite sure I followed the logic or rationale of that statement.

    Thanks.

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