US LNG export project developers face new challenges securing financing for construction after President Donald Trump's threat to escalate a trade war with China, at a time when some are already having trouble signing commercial deals with buyers in Asia.
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The heightened tensions come during a pivotal moment in America's evolution as a major supplier of the chilled fuel to global markets. Most of the dozen or so projects under active development for startup in the early to mid-2020s were hoping to make final investment decisions this year or next.
Shipments to China have fallen off dramatically in the seven-and-a-half months since Beijing imposed a 10% tariff on imports of LNG from the US in retaliation over an earlier round of duties on Chinese products that Washington implemented. Shares of several US developers fell Monday on fears that trend will continue or worsen, with Trump vowing to increase tariffs on hundreds of billions of dollars in Chinese goods to 25% as soon as Friday.
"Increasing tariffs will only slow the discussion and could have real long-term impacts on the pace of US LNG export project development and the many benefits these bring, such as jobs, tax revenue, and environmental benefits," said Charlie Riedl, executive director of Center for Liquefied Natural Gas, an industry trade group.
With China expected to surpass Japan as the world's biggest LNG importer within a decade, long-term contracts with counterparties there are critical to the ambitions of US projects that have yet to get off the ground. The persistence of a broader trade dispute between the US and China would add the risk of limiting Chinese investment in additional US LNG export capacity, potentially slowing development of the so called second wave of US LNG projects.
In a note to shareholders last week, Australia's LNG Limited, developer of the Magnolia LNG project in Louisiana, cited a "general malaise" slowing the execution of long-term contracts in the LNG market, stemming in part from US-China trade tensions. Spokesman Micah Hirschfield said that remains the company's sentiment after Trump's new threat. Company shares slid 1.6% in US trading Monday afternoon.
Elsewhere, shares of Tellurian, developer of the Driftwood LNG project in Louisiana, and Cheniere Energy, which operates LNG export facilities in Louisiana and Texas, fell, as did shares of Dominion Energy, operator of the Cove Point export terminal in Maryland. Shares of Rio Grande LNG export terminal developer NextDecade rose.
Administration officials last week talked up progress in the US-China talks, fueling some hopes a broader trade deal might soon be forthcoming. But Trump, in posts on Twitter Sunday, complained the trade deal talks were going "too slowly," as China attempted to negotiate. So, he decided to turn up the temperature on the talks with the threat about raising US tariffs.
"It further deters Chinese LNG buyers from signing long-term deals with US LNG export projects," said Edward Chow, a senior associate with the Center for Strategic and International Studies. "Such 10/20-year contracts require stability of terms for both sides and provide the financial underpinnings for investors in new US LNG projects to reach a final investment decision and to obtain project financing."
Once the trade frictions are resolved, that does not mean the floodgates would be opened for new deals to rush forward, Riedl said during a panel discussion Monday at an Energy Bar Association midyear forum in Washington. Rather, it will mean a restart of the process of trying to secure deals, he said.
Chinese officials said Monday their team was still preparing to head to Washington for additional trade talks.
Some observers see the potential for a resolution. Trump's latest threats may ultimately be a negotiating tactic, said Citi Research analyst Aakash Doshi, who still expects the US and China to reach a deal in the second or third quarters.
Amy Myers Jaffe, senior fellow at the Council on Foreign Relations and an expert on the geopolitics of energy, said it's still possible China will offer a trade concession that Trump could herald as a temporary announcement of a deal.
But Boston Consulting Group, in a recent report, took a more pessimistic view of the long-term impact that tit-for-tat tariffs, in addition to other market dynamics, could have on further US liquefaction development.
"Based on our model, we could see three to five medium scale to reasonably large scale projects going ahead," said Alex Dewar, a market expert for the consulting group.
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