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Analysts: Oil, LNG exports to China have to skyrocket for trade goals to be hit

Initial estimates by energy and trade analysts indicate that energy exports to China would have to grow exponentially if U.S. export sales are to hit the target of $200 billion by 2021, announced in December as phase one of a new trade deal between the U.S. and China.

Crude oil exports between $38 billion to $57 billion would dominate any slate of products sold to China, experts said, but there are doubts about the ability of China to absorb all that crude, as well as the doubts about the firmness of any deal whose details remain hidden.

According to an announcement by U.S. Trade Representative Robert Lighthizer's office, in exchange for some tariff relief on Chinese goods, China agreed to buy $200 billion more U.S. goods and services in addition to the $186 billion in U.S. goods and services it bought in 2017 before the trade war erupted. The Dec. 13, 2019, announcement didn't break that amount into specific categories.

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Both Panjiva, the trade analysis unit of S&P Global Market Intelligence, and Clearview Energy Partners, a Washington, D.C.-based group of analysts covering energy and policy, conducted a breakdown of how to get to $200 billion worth of exports in two years. Both found that energy exports, predominantly crude oil, would have to make up a large portion of new exports to China.

"The increase in exports looks deliverable, but requires some heroic assumptions on the export of energy and of services market opening in China," Panjiva said in a Dec. 16 research note. "Sending 100% of U.S. oil exports to China would account for an extra $57 billion of shipments, representing the lion's share of the total."

Sending 100% of U.S. LNG exports adds another $9.44 billion, Panjiva said, with both fuels needed to close the $100 billion per year goal implied by the phase one agreement. Most U.S. LNG exports are contracted through long-term agreements with a diverse set of customers all over the world, however, making the prospect of routing all U.S. shipments to China unlikely.

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According to Clearview, using current trade levels, battered by two years of a trade war, the gap is $123.6 billion per year. Assuming a 25% increase in manufactured goods and services exports and $40 billion of new agriculture exports, "implies an eye-popping ~$56.1 B/Y of incremental energy spending," Clearview said. "Intuitively, a larger share of spending on manufactured goods or agriculture could reduce this energy increment, but even ramping agriculture up to a top-line $50 billion per year and taking services up by 33% vs. [trailing twelve months] September 2019 levels would imply a non-trivial increment of ~$46.1 billion per year."

The staggering increases required for energy exports to China have experts expressing doubt, even at this early stage.

"If China was in an environment like a growth environment like they were in, for instance, between 2004 and 2010, where it was really going gangbusters on almost every front, I still think it would be a stretch to try to increase their purchases of agricultural and other commodities in the United States four or five fold in the span of the year," Rice University Energy and Environmental Regulatory Affairs Fellow Gabriel Collins said. "I think even then it would be fairly unrealistic. But I think right now, it's utterly unrealistic."

"Given what just happened over the last two years, who in China is going to want to be the importing entity that says, "I'm going to put all my eggs in the American basket"?" Collins said. "We just had a two year trade war and our governments and our countries, in many ways, are arguably on a strategic collision course. The last thing I'm going to want to do is quadruple down on my economic relationship."

Even if these bolstered export numbers were met, Collins said the phase one agreement misses the real point: technology transfers unfavorable to the U.S. "Where I think this is a massive issue is when we get to the less fungible commodities like technology and technology leadership," Collins said. "I think [the fight] is long overdue on a lot of structural issues: the wholesale theft of intellectual property, these unwritten barriers where there's all different types of bureaucratic pressure applied to U.S. companies."

Tortoise Capital Advisors LLC Managing Director Rob Thummel, a heavy oil and gas infrastructure investor, thinks the Chinese will keep importing more and more LNG as they try to decarbonize their power sector regardless of the tariff feud. "It's not a matter of if, it's just a matter of when," Thummel said. "We still do see the Chinese buying longer term a significant amount of LNG from the U.S. in an effort to follow the U.S. road map in using more natural gas and renewables to reduce carbon emissions."

"Will it be this deal? I think that's hard to say," Thummel said but noted that "to get some substantial LNG into China, you're going to need more infrastructure to be built. LNG import terminals, as we speak, are being been expanded and new ones being built. The puzzle is coming together for more LNG into China. It's just a matter of where it comes from. And if it doesn't come from the U.S., then the U.S. LNG will go somewhere else to replace that LNG that went to China."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.