The Collision Between U.S.-China Trade Policy and LNG Exports

Dean Foreman
Posted January 14, 2019

The U.S. set new natural gas and oil production and export records in the fourth quarter of 2018, even as the administration's trade war with China continued to escalate. As 2018 trade figures have become clear, an emerging consequence was decreased U.S. liquefied natural gas (LNG) cargoes to China, which fell by around 20 percent from 2017, as these shipments became subject to a 10 percent Chinese import tariff effective Sept. 24.

Americans should care about the health of these U.S. natural gas exports because growing markets for domestic natural gas can:

• Generate economic growth at home by helping stimulate additional natural gas development, more than is needed to supply domestic demand;

• Attract multi-billion-dollar U.S. investments in infrastructure – including pipelines, natural gas processing, LNG liquefaction, export facilities and shipping – and the high-quality jobs and wages that accompany these;

• Contribute to the U.S. manufacturing revolution with advantaged feedstocks that have become plentiful as natural gas liquids (NGLs) – ethane, propane, butane and natural gasoline – are extracted from the natural gas for exportation;

• Reduce global greenhouse gas emissions by displacing the burning of coal and biomass in China, India and other places; and,

• Enable electrification in emerging economies that helps raise living standards, create jobs and advance human development.

Let’s put U.S. LNG exports in a global context. According to Bloomberg, global LNG exports only grew by 2.2 percent in 2017 and 1 percent in 2018. By contrast, U.S. LNG exports grew by more than 50 percent in 2018 to more than 3 billion cubic feet per day (bcf/d) and now represent more than 7 percent of the global market:

In fact, U.S. trade data show the value of U.S. LNG exports rose 63 percent year-over-year to $4.4 billion through the first 10 months of 2018. The U.S. was not an LNG exporter just three years ago, so this is all new value to our economy, produced by the energy revolution.

Next let’s look at global LNG imports. The data show there would have been zero global market growth last year if not for China:

Which brings us to our greater concern. Projections may vary, but China is expected to be the major source of future global LNG demand growth, and it’s one of relatively few emerging economies with a clear need for natural gas as well as the ability and willingness to pay for it.

Importantly, LNG is an industry where security of supply and trusted trade relationships are key ingredients to motivate long-term contractual arrangements that underpin the financing and development of new projects. 

The United States’ trade war with China could be resolved this year, and the proverbial clouds over trade relations may clear. However, if global trade fissures continue to deepen, future U.S. LNG projects and the billions in investment and thousands of jobs associated with those projects are likely to be hampered – that is, without support from the world’s largest growth market in China. 

If you were interested in stability of LNG supplies, from China’s perspective would you rather build additional Russia/Caspian pipeline capacity, contract for more LNG from neighboring Papua New Guinea or Australia, or sign up to buy more U.S. LNG amid a trade war?

The sky isn’t falling for the United States (not yet at least), but if the U.S. wants to motivate a second wave of new LNG projects – and it should – and compete globally against other natural gas sources, then it needs a reasonable solution to the U.S-China trade standoff. 

Moreover, in economics-speak, this is a path-dependent game, where a credible commitment to advance a project anywhere in the world can foreclose the opportunity to move others forward in other parts of the world. 

As a case in point, consider LNG Canada, which took an affirmative final investment decision this past October. LNG Canada – the largest private-sector investment project in Canadian history – received backing by the Canadian federal government and tentatively locked in more than 3 bcf/d of what the U.S. Energy Information Administration (EIA) and Bloomberg anticipate may only be about 20 bcf/d of total LNG exports from North America by 2040.

By contrast, U.S. LNG projects haven’t asked for handouts – only that they receive expedient FERC/DOE permitting and the ability to compete on a global playing field that is as level as possible. Unfortunately, a number of approvals remain under consideration by FERC that should be moved forward.

U.S.-China trade frictions have already had real consequences in terms of LNG export cargoes, but the ultimate price may be to undermine the United States’ competitive position in the future of LNG market growth. 

Time will tell, but we need progress in resolving U.S.-China trade differences, with an eye on the larger prize: sustaining and advancing the U.S. energy revolution for decades to come.