White House urged to count long-term LNG contracts toward Phase 1 China totals

An LNG trade group is urging the Trump administration to count long-term contracts with US LNG facilities toward China's obligations for energy purchases under the Phase 1 trade agreement.

The effort comes as LNG market conditions and depressed demand associated with the coronavirus pandemic have added obstacles to China reaching the total $50 billion in purchases of US energy envisioned for 2020 and 2021 under the interim deal.

It also comes as President Donald Trump recently threatened to pull out of the Phase 1 deal if China falls short of purchase totals for energy and farm products. The Phase I deal has been viewed as encouraging negotiations with Chinese state-owned buyers of LNG, and its fragility could add headwinds for US LNG developers.

"We understand your frustration and believe that there is a solution -- at least as it pertains to energy -- that could represent a win-win result for both sides," LNG Allies and independent producer group American Exploration & Production Council told Trump in a letter Wednesday.

MARKET HEADWINDS

"While it is possible for China to meet a portion of these commitments through the spot purchase of US LNG, it is simply impossible for them to reach the full levels anticipated under the agreement given current economic and energy market conditions," they said.

The groups argue that new long-term contracts between Chinese buyers and US sponsors of new or expanded LNG projects would do more to bolster jobs and investment in the US than shorter-term purchases involving spot LNG in the secondary market that would largely result in swaps and rearrangement of cargoes.

"We understand that the US relationship with China -- including the Phase I trade deal -- is in a state of uncertainty," said Fred Hutchison of LNG Allies in an email Thursday. "However, given the difficulty that the Chinese will have in meeting their 2020 and 2021 energy purchase obligations given present and anticipated market conditions, we felt an alternative was worth considering."

To bolster their case, the group also sent along a policy brief by Steven Miles and Kenneth Medlock of Rice University's Center for Energy Studies, elaborating on the case for a longer term focus as a way to make the US-China deal succeed, benefiting both parties and avoiding a force majeure claim by China.

"The real benefits to the US from the energy purchases aren't just moving molecules, they are generating thousands of jobs of employment, hopefully to the energy sector, [and] helping with the raising of capital for new projects," Miles said during a press conference on the request Thursday. "That only happens when there is new steel in the ground being built and constructed and developed and financed."

TALLYING ONE OR TWO CONTRACTS

By way of example, a long-term purchase agreement for two 4 million mt/year trains could amount to $30 billion to $50 billion over the life of the contract, according to the brief, which used a price four years from the date of the paper.

"Launching one or two large US LNG projects would put a big dent into that $50 billion" total in the Phase 1 deal, Miles said.

Anne Bradbury of AXPC acknowledged on that call that there may be turmoil ahead in US-China trade negotiations. "But to the extent Phase 1 agreement is still in effect right now and conversations are ongoing, we thought that this was an important time to be raising this, especially given everything that's happening in the oil and gas sector at the moment," she said.