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US/China trade deal – what does it hold for LNG?

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Wood Mackenzie’s Asia/Pacific Vice Chair, Gavin Thompson, has commented on how the Phase One signing of the trade agreement between US and China earlier this month, will affect the LNG trades.

He said: “From an energy perspective, what is most notable is China’s agreement to increase energy imports from the US by up to $52.4 bill over the next two years as a part of a commitment to spend around $200 bill more on US goods and services than it did in 2017.

“Let’s be clear; $52.4 bill over two years is a lot of energy. But neither the 5% tariff on US crude oil nor the 25% tariff on US LNG is to be reduced or removed by China under the Phase One deal. For China to massively increase imports of oil and LNG from the US while tariffs remain in place, is going to be challenging.

“Consider LNG. In 2017, China imports from US were approximately 1.5 mill tonnes, worth around $0.6 bill. If China is to increase the value of US LNG imports considerably as a part of this agreement, let’s say to around 10 mill tonnes in 2021, then the 25% tariff would need to be either absorbed by the importing company, or passed through to the consumer. We expect that Chinese national oil companies will be reluctant to commit to large-scale purchases given this.

“At the same time, the next two years will also see a slower pace of gas demand growth in China, rising domestic production, and the arrival of Russian pipeline gas, creating a more competitive gas market.

“The Chinese uncontracted LNG demand is estimated to be 17 mill tonnes in 2020 and 23 mill tonnes in 2021; US offtakers will now be looking to target this market.

“Contract and portfolio suppliers with contracted supply into China and US offtakers – notably Shell, BP and Cheniere – could also target increasing volumes of US LNG within existing contracts into China, if agreement can be reached with key buyers, including CNOOC and PetroChina,” he concluded. 

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