Energy deals warm US-China trade ties
CHINA: China and the United States have struck an economic ‘‘grand bargain’’ forged on energy, hoping to narrow the enormous trade gap between the two countries and celebrate the one sector where interests are genuinely aligned.
Presidents Xi Jinping and Donald Trump set aside differences to back a US$43 billion (NZ$62b) gas venture in Alaska intended to help meet China’s voracious demand for natural gas, and to soothe strategic tensions.
The Chinese state oil group Sinopec is to join forces with the state of Alaska to build a 1300km pipeline through fearsome terrain from the North Slope to southern waters, aimed at shipping liquefied natural gas (LNG) across the Pacific. Much of the funding will come from the Bank of China and the country’s wealth fund, China Investment Corporation.
The Trump administration said the project would trim US$10b a year off America’s trade deficit with China, which reached a record US$347b last year and is a festering grievance for the US.
There was a separate deal with headline pledges of US$84b over 20 years for investment in shale gas and chemical projects in West Virginia, led by China Energy Investment Corp.
The deals were part of a quarter trillion dollar package agreed by the two leaders in Beijing, where Trump arrived with a hundred corporate bosses angling for Chinese state patronage.
In a bizarre pirouette, Trump praised president Xi effusively and attributed the trade imbalances to decades of incompetence by the US political class, prompting gasps of astonishment from his audience.
During his campaign Trump repeatedly accused China of ‘‘raping’’ the US economy. ‘‘Who can blame the country for being able to take advantage of another country for the benefit of its citizens. I give China credit. Actually, I blame past US administrations for allowing this out-of-control trade deficit to take place,’’ he said.
Hugo Brennan, from from strategic consulting firm Verisk Maplecroft, said Trump had come away with thinner pickings than Washington cares to admit. The deals let him preen as ‘‘a master deal-maker’’ without tackling the deeper causes of the trade gap.
Brennan said the Alaska venture dovetails with China’s ‘‘Belt and Road’’ strategy, helping to break reliance on maritime chokepoints such as the Malacca Strait. Yet the terms are not pinned down in a legal contract.
‘‘Its non-binding nature gives Sinopec the flexibility to quietly back away from the deal down the line,’’ he said.
Even so, energy is China’s Achilles’ heel. While the Chinese have ample reserves of cheap coal, they face a simmering middle-class revolt over the suffocating smog in the major cities. The Communist Party has been alarmed by signs that protests are meta-morphosing into a political mass movement.
Chinese leaders are acutely aware their country is in the frontline of global warming. The glaciers of the Tibetan plateau are melting, threatening the water supply for the arterial rivers of China. The aquifers that irrigate the North China Plain are critically depleted.
The country is switching to cleaner natural gas at breakneck speed, aiming to raise the gas share of total energy use from 6 per cent last year to 10 per cent in 2020 and 15 per cent in 2030. Most of this will have to come from imports. The dash for home-drilled shale in Sichuan and Xinjiang has been blighted by unfriendly geology and lack of water.
The US began exporting LNG from Sabine Pass in Louisiana last year. It will increase shipments seven-fold by 2019, challenging Qatar and Australia for LNG dominance.
The American strategy is a perfect fit for China, allowing it to play off more suppliers against each other, while throwing Trump a political bone. ‘‘If the US wants to narrow the deficit, energy is the obvious way to do it,’’ said Neil Beveridge at Alliance Bernstein.
Consultants Wood Mackenzie think China’s annual demand for US LNG could reach US$26b by 2030.
The arrival of LNG from the US helps prevent Russia gaining the sort of pipeline stranglehold it achieved in Europe. Gazprom is to start shipping gas from East Siberia next year, with an eventual target of 38b cubic metres (BCM), but Beijing has driven a very hard bargain.
Prices of traded LNG have recovered to US$9.50 per British Thermal Unit in the Asian market after languishing near US$5 earlier this year, largely driven by Chinese demand. ‘‘We are seeing 40 per cent year-on-year growth in LNG imports,’’ said the International Energy Agency.
Beveridge said China’s gas needs will triple to 600 BCM by 2030. – Telegraph Group