SINGAPORE—Chinese purchases of U.S. LNG are unlikely to surge, despite an agreement for China to buy more U.S. energy supplies, because tariffs on gas from the United States remain in place, analysts and traders said.
Under a Phase 1 trade deal between the world’s two largest economies signed this week, China has committed to buying an additional $52.4 billion worth of U.S. energy supplies, including LNG, over the next two years.
But a 25% tariff imposed by China on U.S. LNG, which has pushed the price of U.S. gas above the spot market and restricted purchases, remains for now while Washington and Beijing negotiate a Phase 2 trade deal.
“For China to massively increase imports of ... LNG from the U.S. while tariffs remain in place is going to be challenging,” said Gavin Thompson, Wood Mackenzie’s Asia Pacific vice chair.
China’s demand for LNG over and above existing contracts is expected to be about 15 million to 25 million tonnes a year over the next two years, according to analysts.
If China covered all of this demand with U.S. LNG despite the tariffs, that would increase Beijing’s purchases of U.S. energy by about $11 billion to $12 billion, or only 20% of the two-year target in the Phase 1 deal, analysts said.
“We expect the Chinese government to remove, reduce or approve tariff exemption before incremental LNG imports from the U.S. can be meaningful,” said Jenny Yang, director of IHS Markit’s greater China Gas, Power, and Energy Future division.
If China were to buy far more U.S. LNG, importers would have to absorb the cost of the tariffs or pass it on to consumers, which could make Chinese state oil companies reluctant to commit to large-scale purchases, Wood Mackenzie’s Thompson said.
Even if tariffs were removed, U.S. LNG would still be about $1.50 to $2.50 per million British Thermal Units (mmBtu) more expensive than gas available in Asia, analysts and traders said, referring to Asian spot prices which are at seasonal lows.
The deal will, however, provide a boost to U.S. LNG projects under development and boost growth in overall Chinese demand, analysts said.
For now, several Chinese traders told Reuters they would be taking a wait-and-see approach instead of rushing into deals.
“I personally don’t think the U.S. will lower or significantly remove additional tariffs which means China may not cancel tariffs for U.S. LNG,” a senior LNG executive at a Chinese company said. “I don’t think anyone is in a position to have a deal quickly.”
Recommended Reading
Marathon Closes $3B Eagle Ford Buy From Ensign
2022-12-30 - Marathon Oil’s transaction, along with other Eagle Ford deals — and Chesapeake Energy Corp.’s efforts to sell its South Texas position — have put the play back in the M&A spotlight.
Arena Energy Acquires Cox Operating's GOM Shelf Properties
2023-01-25 - Arena Energy's acquired interests add to the company's ownership interest in the Eugene Island 330 and South Marsh 128 fields in the U.S. Gulf of Mexico.
State of Shale 2023, Marcellus: Long Live the King
2022-12-30 - As geopolitical turmoil takes center stage, E&P leaders see the Marcellus at a turning point in aiding global economies reaching energy stability and recovery.
Shell Green-lights GoM Dover Project
2023-03-15 - Shell’s U.S. Gulf of Mexico subsea tieback will add 21,000 boe/d to the Appomattox production hub by early 2025.
Inside Comstock’s North Houston ‘Western Haynesville’
2023-02-23 - Comstock Resources is putting modern horizontals and frac jobs into the deep Bossier, long known to be a super-stocked natgas tank. It’s looking like the new recipe works.