A warming trade relationship between the U.S. and China, with talks and a suspension of tariffs on imported Chinese goods, could spur a wave of investment desired by the American LNG industry.
The U.S. and China said in a joint statement on May 19 that both countries had agreed on "meaningful increases" in American agriculture and energy exports as a way to lower the U.S. trade deficit with China. U.S. Treasury Secretary Steven Mnuchin said on FOX News that such a compromise could lead to $50 billion to $60 billion a year of Chinese investment in U.S. energy exports over the next three to five years.
While energy exports alone are unlikely to meet President Donald Trump's goal of slashing the trade deficit by $200 billion a year, Height Capital Markets said a hiatus in escalating tariff threats could result in new LNG commitments to the tune of $20 billion to $30 billion a year.
"Several products, but especially LNG and ethanol, have the potential to erode trade deficits with China meaningfully even though an enormous commitment to purchasing those products from the U.S. would still only offset a fraction of the overall deficit," the policy-focused investment bank said in a note. "Nonetheless, we believe the market should be optimistic that the negotiating environment could support certain products, even driving contracting activity from projects like expansion trains owned by [Cheniere Energy Inc., Sempra Energy] and Freeport as well as standalone projects like [NextDecade Corp.'s] Rio Grande or [Pembina Pipeline Corp.'s] Jordan Cove."
U.S. LNG export pioneer Cheniere is the only company to have signed a binding LNG contract with China. The developer in February announced two contracts with PetroChina International Co. Ltd., a subsidiary of the state-run China National Petroleum Corp.
Other U.S. LNG export hopefuls have made China a prime focus in their pursuit of the long-term contracts that allow them to finance their multibillion-dollar projects. China is expected to become the top LNG importer in the world, and the country has been ramping up its imports of U.S. LNG over the past year. But analysts have cautioned that "all bets are off" if trade relations with China sour, a rising concern since Washington and Beijing began threatening each other with tariffs.
The new tone in Washington is a "positive development" for U.S. LNG export developers, said Langtry Meyer, COO of the proposed Texas LNG project, which has five nonbinding memorandums of understanding with Chinese buyers. "Sentiment in the LNG markets is heating up very quickly," he said.
Aside from Texas LNG, the state-led Alaska LNG export project and offshore Delfin LNG export project have also announced preliminary agreements with China.
The most likely commitments would come from buyers who are on the fence about signing finalized contracts, said Nikos Tsafos, an LNG consultant and co-founder of the research firm Enalytica. "It is easy to see two or three contracts with Chinese buyers pushing some projects towards final investment decision and hence being declared a big political win for both sides," he said.
