By Irina Slav
“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. 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.
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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.”
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.