North American energy exporters counting on a Chinese recovery that sticks

The boost to North American energy exports from an economic recovery in China and parts of Asia where people are being encouraged to return to work may be short-lived if a second wave of the coronavirus occurs and blunts commercial activity again, industry observers said Thursday.

As the first US LNG cargo to be delivered to China in more than a year nears its destination, and at least five other tankers that loaded on the Gulf Coast follow close behind, there is hope for greater trade flow optionality as producers, traders, and end-users scramble to find a home for the fuel amid weak prices and depressed demand.

During a webcast, experts from advisory firms KPMG and the Eurasia Group said they were cautious about signs of China's increased appetite for oil and gas. Separately, a report issued by the Center for Energy Studies at Rice University's Baker Institute for Public Policy said new long-term purchases of US energy would be a healthier sign for the market than the spot volumes that are now moving.

"From China's perspective, purchasing spot cargoes gives it no certainty about the availability of reliable long-term supply, which is germane to aspirations of secure sources of energy for continued economic growth," the Rice report said. "But if China were to contractually underpin the launch of a new LNG liquefaction facility, it would have an additional committed supply source for decades."

The flow of LNG and other energy products from the US to China was already under pressure well before the coronavirus pandemic, due to the trade war between the two countries that began in 2018 and escalated in 2019. An initial trade agreement was announced in January, around the same time the highly contagious respiratory virus began to spread from China across the world.

Over the ensuing months, energy demand cratered amid widespread stay-at-home orders. Recently, however, most businesses in China started to resume commercial operations and employees began returning to work, raising expectations of an uplift in downstream gas demand.

"We're cautious on China for several reasons," Robert Johnston, managing director, energy climate and resources, and executive advisor, at the Eurasia Group, said during the webcast.

One is the possibility of a second wave of the virus taking hold, while another is the potential for tensions to flare up again between the US and China over trade and who is responsible for the spread of the virus, he said.

"All those supply chain risks," Johnston said. "Those are potential headwinds for China as well."

Hanging in the balance is the future of numerous liquefaction projects in the US, Canada, and Mexico that are being proposed to be built for startup around the mid-2020s. Developers have been counting on Chinese buyers to help them sanction their projects. China is expected to become the world's biggest LNG importer by the end of the decade, according to S&P Global Platts Analytics.

"While global energy demand is challenged in the near term, sustainable economic growth is a long-term consideration, and access to secure energy resources is critical," the report from Rice's Baker Institute said. "In the US, the LNG pump is primed and there is no shortage of opportunities for Chinese purchase commitments to push projects forward rapidly."