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Bernstein: 'All bets are off' for China-spurred US LNG growth if relations sour

The so-called second wave of U.S. LNG export capacity will depend on how much U.S. natural gas China looks to buy, asset management firm Sanford C. Bernstein & Co. LLC said in a recent report. Bernstein analysts cautioned that "all bets are off" if trade relations between the two countries worsen.

About 150 million tonnes per annum of global LNG export capacity will be added over the next five years, according to Bernstein analysts led by Neil Beveridge. Whether that growth occurs in the U.S. comes down to China, which is looking to ramp up its use of natural gas in an effort to improve air quality.

"The biggest wildcard is China," the March 23 report said. "LNG could be used as a tool to make a significant dent in the U.S.-China trade deficit, but if relations sour then all bets are off."

Trump administration officials told reporters March 22 that the White House will impose tariffs on $50 billion of Chinese imports, a move some energy experts said could make it more difficult to persuade potential LNG buyers in the country to sign up for long-term volumes of U.S. gas. China is already subject to a 25% tariff on imported steel and a 10% tariff on imported aluminum, which the LNG industry has said will raise costs for already pricey liquefaction and export terminals.

Getting Chinese buyers to commit to 20-year contracts for U.S. LNG was already a challenge amid ample global supply and concerns that the U.S. government would use the agreements as a political weapon. Despite those obstacles, Cheniere Energy Inc. in February signed the first long-term contract with China for U.S. LNG. The company, which operates the Sabine Pass LNG export terminal in Louisiana and is developing the Corpus Christi terminal in Texas, has said it can double the size of its business due, in large part, to anticipated growth in Chinese demand. Other LNG developers have flocked to Beijing in pursuit of deals that will help their projects move forward.

Bernstein cautioned that although U.S. LNG advocates tout the benefits of supply linked to Henry Hub gas pricing, Asian buyers may not be ready to break away from LNG tied to oil prices.

"While there is scope for expansion beyond the 70 mtpa of LNG in operation or under construction, there are clear challenges to exporting the Hub linked pricing model across the Pacific," Bernstein said. "Gas prices in Asia remain tied to oil (for now) making buyers reluctant to enter into Hub linked contracts."