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Steel tariffs may disrupt future US crude, LNG exports

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Steel tariffs may disrupt future US crude, LNG exports

If trade balance is the goal of U.S. President Donald Trump's tariffs and quotas on imported products, crude oil and LNG exports could help him make the equation work, a panel of experts said at an energy conference in Washington, D.C.

But a trade war, particularly one that raises the price of imported steel, will raise the cost of oil and gas production, pipelines and export terminals, making crude oil and LNG exports less competitive on the global market, they said.

"I think part of the United States' trade deficit for years has been imported crude," said Saad Rahim, chief economist for energy trading giant Trafigura, on a June 4 panel at the U.S. Energy Information Administration's 2018 Energy conference. "I think this is an excellent way of helping rebalance our trade deficit. For China, in particular … we were at about five VLCCs [very large crude carriers] of crude up until a month ago. Now we are probably looking at about eight, maybe more, going forward, which is about 2 million barrels per VLCC."

Royal Dutch Shell PLC senior LNG market analyst Ryan Hickman agreed. He said he thinks U.S. LNG exports to China, in particular, are going to grow, describing China as the third-largest consumer of U.S. LNG. And LNG exports have the backing of the Trump administration, he said.

"LNG is probably a kind of highlight on improving the trade imbalance," Hickman said.

The panelists agreed that hikes in the prices of imported steel could hurt U.S. oil and gas. The costs will be borne by the whole industry, IHS Markit Vice President Blake Eskew said. On a well pad, "all those trucks, all those pumps, those are all made out of steel," he said. "Anything that raises the price of steel raises the cost of oil production. If it is an ethylene cracker or a refinery, look around, all you can see is steel."

If forecasts of oil and gas production growth come true, the U.S. will need more pipeline capacity, Rahim said. "The grade of steel that you need, you don't really make in the United States anymore," Rahim said. "As an old colleague of mine used to say: 'effectively you are turning steel into oil.' As these costs go up, I think they are going to pass through." Rahim said he has heard estimates of $70 million to $100 million in additional costs for some pipeline projects.

Shell is still a big believer in the future for natural gas and LNG as the world replaces coal, Hickman said. He said any oversupply in the LNG market would be temporary, noting that demand for U.S. LNG has outpaced supply since Cheniere Energy Inc.'s Sabine Pass LNG LP and Dominion Energy Inc.'s Dominion Energy Cove Point LNG LP terminals have come online.

The LNG market is "opening up in the early 2020s, but if you look at 2016 and 2017… we had calls going through those two years that we'd have an oversupply of LNG," Hickman said. "The result was a strong, strong response from the demand side. So, in the near term, the market has cleared at a higher price than anybody thought."

"There is a lot more supply coming online, but ... there is only 7 million tonnes of [new] LNG capacity" getting the final go-ahead from developers, Hickman said. "If there is an oversupply it will be short-lived because of the dynamics that are setting up that way."

But a trade war could throw a wrench into the moving parts of U.S. LNG exports, Hickman said. "It's tough to quantify what that impact is going to look like now, or if ever, but anything that impacts competitiveness is going to have an impact on how much [gets exported]," he said.