Tariffs could hinder U.S. LNG ambitions
New tariffs on Chinese imports could make it harder for U.S. liquefied natural gas exporters to tap into China’s booming market and raise billions for the next generation of Gulf Coast LNG facilities.
If the Trump administration follows through on plans to impose tariffs targeting roughly $60 billion in Chinese goods per year, the new trade policy could fur- ther complicate a complex relationship and add another layer of risk that could scare off investors already jittery about doing business with China.
LNG operators need to line up long-term contracts to gain the financing and investment needed to build multibillion-dollar projects that convert natural gas to a liquid form and ship it to foreign markets. Investors and lenders were already wary about Chinese
buyers honoring contracts for the full-length of their 20-year term. A trade war that could drive the Chinese to buy LNG from Australia, the Middle East or other U.S. rivals only adds to the uncertainty for investors and the projects.
“Contracts with Chinese buyers may be off the table for the next wave of projects,” said Katie Bays, an energy investment analyst at the consultancy Height Capital Markets in Washington.
China’s demand for liquefied natural gas is surging as the government attempts to lower the country’s carbon dioxide emissions by using gas for power generation instead of coal. Spot LNG prices in Asia climbed to the highest point in three years in December, as buyers gobbled up record amounts of gas in the wintertime, according to S&P Global Platts.
Chinese demand for LNG, which makes up 20 percent of the global market, is set to rise from 40 million tons to 100 million by the early 2020s, analysts said. It’s where U.S. exporters hope to send a giant chunk of their natural gas in coming years, as LNG export capacity nearly triples from 3.5 billion cubic feet of gas a day this year to 9.6 billion by the end of 2019, according to the Energy Department.
U.S. companies like Houston’s Cheniere Energy and Tellurian plan to build 10 multibillion-dollar projects in Texas, Louisiana, Georgia and Maryland over the next decade to ship natural gas from the nation’s shale plays overseas. But several of these projects have yet to get the go-ahead as companies try to line up contracts and financing.
China will “clearly be a very important driver for any project that would like to enter service in the near future,” Bays said. But the Trump administration’s tariffs on Chinese goods would exacerbate the obstacles in locking down LNG contracts there, especially if China retaliates for the change in U.S. trade policy, she added.
The new tariffs on Chinese goods, which the Trump administration may announce this week, according to multiple reports, would come as the construction costs climbs for oil companies and LNG exporters that would have to pay more for materials. Earlier this month, Trump announced a 25 percent tariff on imported steel, which analysts and economists say will almost certainly cost the oil industry jobs.
On Monday, Jack Gerard, president of the American Petroleum Institute, said the U.S. oil and gas industry needs “clarity and flexibility” on the tariffs, saying the industry trade group expects the Commerce Department to take into consideration that oil companies use specialty steel not made in the United States.
The Commerce Department is working to determine which industries and types of metal will be excluded from the tariffs, to try and minimize damage to the U.S. economy, while still putting pressure on China and other Asian steel producers.
The stakes are particularly high for the oil industry, which relies on steel to build to build pipelines and other equipment to meet growing production from the hydraulic fracturing boom.
“We support an exclusion process from the Department of Commerce that is both transparent and flexible,” Gerard said. “That will allow the U.S. oil and natural gas industry to continue our significant investments in producing, transporting and refining U.S. energy resources, building world-class infrastructure and creating high-paying American jobs.”
U.S. LNG exporters are already facing higher project costs because of the steel tariffs.
Steel accounts for roughly 10 percent of the cost of building an LNG facility. A roughly 25 percent price increase in steel costs could lift project expenses by around 3 percent to 5 percent, said Akos Losz, a research analyst at the Center on Global Energy Policy at Columbia University. That could add hundreds of millions of dollars to the cost of building an LNG export terminal, Losz said.
Houston LNG exporter Tellurian, which is building a $15.2 billion gas export terminal in Louisiana, said in regulatory filings last week that its project costs could climb substantially when steel tariffs are imposed.
In the U.S., Cheniere began exporting the nation’s first shipments of shale gas from its facilities at Sabine Pass, La., in early 2016, after it brought its first supercooling unit online to turn natural gas into a liquid.
In the first year, the nation’s only active LNG export facility sent less than 1.5 billion cubic feet of natural gas per day overseas. But as it brought three more LNG processing plants online, exports nearly doubled to 2.8 billion cubic feet per day by the end of 2017. Cheniere’s fifth unit is under construction and will bring its export capacity to 3.5 billion cubic feet a day this year.
U.S. companies, including Cheniere, are building five other LNG projects, including two in Texas and one in Louisiana. Another eight have been approved by government agencies but are not yet under construction, awaiting approval from corporate executives, according to the Federal Energy Regulatory Commission.
Over the next few years, analysts expect China to benefit from the global surge of natural gas exports. China could make progress toward reducing air pollution that hangs thick over its capital, Beijing, and other major cities.
“The diversity of supply will be helpful for China, but the biggest impact will be on the environment,” said Rob Thummel, portfolio manager at Tortoise Capital Advisors, an investment firm with more than $19 billion under advisement. “China needs to lower its CO2 emissions, and one of the most practical ways to do that is to use LNG instead of coal.”
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