Chinese tariff relief for US goods leaves out LNG for now

China's plan to cut tariffs on imports of US crude but leave duties on LNG in place for now renewed uncertainty for American producers and liquefaction facility developers that already faced a tough field in Asia.

January's initial trade agreement between Washington and Beijing held out the hope for new long-term contracts for supplies from existing and proposed US export terminals. So far, however, it has done little to relieve the pressure on the industry.

With record low prices for LNG in key end-user markets, weaker-than-expected demand and trade flow disruption following the coronavirus outbreak, US operators have been counting on China reducing or eliminating its 25% tariff on US LNG. On Thursday, China said it would lower the tariff on imports of US crude to 2.5% from 5% on February 14. Other US products, including soybeans, also received relief. But the wait for LNG continues.

"They are having a difficult time doing anything with tariff uncertainty," Yong J. An, a former legal counsel for Korea Gas, said of US exporters and Chinese buyers, during an industry conference earlier this week in Houston. "Asia is looking and waiting for a good solid policy decision from the administration."

Cheniere Energy, which operates export facilities in Louisiana and Texas, is currently the only long-term supplier of US LNG to a Chinese customer. It has a 1.2 million mt/year supply contract with PetroChina. Cargoes under the contract have continued to be lifted, but have been diverted since China raised its tariff on US LNG last year to 25% from 10%.

In the meantime, several developers of new liquefaction facilities in the US have repeatedly delayed final investment decisions, some to 2021 and beyond. Last week, Magnolia LNG developer LNG Limited warned that it needed to immediately raise additional cash to be able to continue normal operations.

For years, the expectation had been that China, the world's most populous country, would become a major customer of US LNG, helping developers sanction new projects. By the end of this decade, it is expected to be the biggest importer of LNG, and the US has been on a trajectory to be the biggest exporter even before then.

Counting on Chinese demand, several US developers have chosen locations specifically to reduce the shipping distance to markets in East Asia. Examples include Alaska LNG and Pembina's Jordan Cove LNG in Oregon. Expected startup of both projects has been delayed multiple times. Neither has announced a final investment decision.

VIRUS IMPACT

The coronavirus outbreak has complicated matters for US developers by sparking fears of a major economic slowdown in China, amid quarantine measures and travel restrictions. A source close to China's state-owned CNOOC said Thursday that the company has declared force majeure on LNG contracts. Such a declaration typically amounts to an unforeseen circumstance that prevents a counterparty from fulfilling a contract.

The move came as China's largest LNG importer tackled disruptions in downstream markets in the wake of the outbreak. It further dimmed China's demand outlook and raised concerns about its impact on global trade flows and prices, with Platts JKM – the benchmark price for spot LNG in Northeast Asia – plunging to a historic low of $3.15/MMBtu on Wednesday.

Whether other Chinese LNG importers might use the outbreak as a reason to issue a force majeure declaration remained unclear. A Cheniere spokesman did not immediately respond to a request for comment on whether there could be any impact to the PetroChina contract.