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Trade War Puts The Brakes On U.S. LNG Dominance

The U.S.-China trade war is throwing off a new liquefied natural gas production plant in North America, as LNG Ltd. loses Chinese customers.

Australia-based LNG Ltd. saw its share prices plunge 29 percent after CEO Greg Vesey discussed the problem in a quarterly report. LNG Ltd.’s Magnolia plant in Louisiana was counting on Chinese investors to ramp up its capacity of reaching 8 million tons per year of LNG. The company will now be delaying a final decision on whether to build the U.S. plant.

The company had been planning to build two plants — Magnolia, where it planned to begin exports in 2022, and another in Nova Scotia, Canada.

China is a leading global market for LNG. Energy consulting firm Wood Mackenzie forecasted that the market would see its record 8 mt demand last year shoot up to 12 mt this year. That will account for 50 percent of all global LNG demand growth, the firm reported. That growing demand will likely help to offset an LNG global supply glut.

China sees LNG as crucial in its efforts to clean up urban air pollution, with the government setting a target of reducing coal usage and having natural gas make up at least 10 percent of its power generation by 2020. The country has already spurred LNG demand along, benefitting global LNG suppliers.

Beijing’s pollution crackdown has spurred Chinese LNG demand in recent years, with imports nearly tripling since 2015. Last year, China surpassed South Korea and to the world’s No. 2 importer of LNG.

President Donald Trump had been promoting the U.S. as the dominant supplier of the super-cooled fuel as export demand grows particularly in Asia.

Canada has been competing for market share, helping to make the region a strong player in LNG. Royal Dutch Shell just approved a major Canadian project, raising enthusiasm for the North American market.

The ongoing trade war between the two nations, and China’s recent decision to impose an LNG tariff, is taking away interest in China for LNG coming from suppliers like LNG Ltd. The company acknowledged the difficulty of lining up Chinese customers for its fuel.

Bankers and analysts in the energy sector have been wondering whether the next wave of projects in the pipeline would find backing from investors. Related: Iran’s Worst Nightmare Is Coming True

LNG Ltd. had been optimistic about its North American plants — until the escalating trade was between Beijing and Washington took over. China imposed a 10 percent tariff on imports of U.S. LNG.

“For us, it’s strictly been about marketing to China,” Vesey had told Reuters in May, prior to the LNG trade sanction was issued by China in September.

The company is now targeting final approval for Magnolia in “the first part of 2019,” depending on how talks to line up contracts go, Vesey said.

LNG Ltd. may have to reorganize its strategy and tap into strong demand from other markets.

“While trade issues with the Chinese market impact our discussions, our negotiations with customers in other parts of the world remain strong,” the LNG Ltd. CEO said.

The tariffs have put a chilling effect on LNG companies, two U.S. industry sources said.

U.S.-based LNG producers had been able to tap into the underutilized infrastructure and cheap natural gas to get a foothold in the global market. But newcomers such as

Tellurian Inc, NextDecade Corp., and Venture Global LNG, face challenges ranging from financing to contract pricing to pipeline access.

Established players like Shell, Exxon Mobil, Qatar Petroleum, and Cheniere Energy, a leading U.S. LNG company, are in a much better position to weather the trade war than startups. That will support plant construction and expansion of existing export facilities, and each of these four companies have LNG projects in the works. Related: $5 Billion Saudi LNG Investment Plays Into Russia’s Hands

Shell and its partner this month approved the C$40 billion ($31 billion) LNG Canada project. It’s expected to produce 14 million tons of new capacity per year before 2025, with the option to double that output.

Canada is in a good position to take away CNG share from the U.S. market.

Oil giants and new energy companies see great potential in the LNG market with power plant energy demonstrating growing demand, as governments mandate using cleaner fuel than coal. It’s also become a transportation fuel option finding growing interest for powering ships and freight-hauling trucks.

Compressed natural gas (CNG) has been able to take away some of that interest among fleet operators converting over from diesel trucks, but LNG is still being taken seriously by that market segment. A growing LNG fueling infrastructure and export facilities should help that segment of the market grow, as well.

By Jon LeSage for Oilprice.com

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  • Mamdouh G Salameh on October 30 2018 said:
    US LNG is paying the price for President Trump’s folly of starting a trade war with China. Other than losing the China which is projected to overtake Japan in 2019 to become the world’s largest LNG market, it is also adversely impacting on the future of US LNG companies such as Australia-based LNG Ltd whose Magnolia plant in Louisiana was counting on Chinese investors to ramp up its capacity of reaching 8 million tons per year of LNG. The company will now be delaying a final decision on whether to build the US plant until 2019. The Magnolia plant was supposed to begin LNG exports by 2022.

    China sees LNG as crucial in its efforts to clean up urban air pollution, with the government setting a target of reducing coal usage and having natural gas make up at least 10% of its power generation by 2020.

    President Donald Trump has been promoting the US as major supplier of LNG to the Asia-Pacific region particularly China. However, the escalating trade war between the two nations saw China retaliating against US tariffs by imposing a 10% tariff on imports of US LNG thus making them far more expensive than Qatari or Australian or Russian LNG.

    Moreover, the escalating trade war between China and the US is enhancing China’s LNG imports from Russia’s recently commissioned Yamal LNG project in the Russian Arctic. Yamal LNG effectively doubled Russian LNG output to just over 20 million tons per year (mtp/y), making the country the fifth largest LNG exporter in the world. China’s CNPC holds a 20% stake in the Yamal project with China’s Silk Fund holding a 9.9% stake.

    Therefore the sooner President Trump realizes the futility of his escalating trade war against China, the better for the global economy and US economy. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment

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