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As trade war simmers, study finds China deals are not crucial to US LNG projects

A trade war between Beijing and Washington created anxiety over the chance that it might drive away natural gas buyers from a second generation of multibillion-dollar U.S. LNG export projects, but a paper from the Center for Strategic and International Studies suggested the role of China has been overstated.

To be sure, China remains an important player in the LNG market as the world's second-largest importer of the commodity and the third-largest buyer of American LNG. But Chinese buyers are not essential to underpin projects, Nikos Tsafos found in a paper looking at Chinese activity in overseas LNG project development stretching back to the early 2000s. Tsafos is a senior fellow with the energy and national security program at the Center for Strategic and International Studies.

"If you are out there saying that I need Chinese buyers in order to get my project going, that's just not really what we've seen over the last few years in terms of the projects that have actually moved forward and taken [final investment decisions]," Tsafos said in an interview.

"And in today's market environment, there are a lot of projects vying for supply," Tsafos said. "Everything else being equal, the trade war worsens the competitive position of the United States. But it's a very competitive landscape, and the United States has other benefits."

Whether those benefits offset the trade war risk depends on the discretion of individual companies, Tsafos said. And often the companies signing up for contracts used to support LNG projects around the world have been large portfolio players that look to resell the gas in markets around the world, including in China. But Tsafos found that commercially sanctioning the terminals did not, in practice, require directly engaging Chinese companies as foundation buyers.

The report found that most global projects that reached a final investment decision since 2012 did so either without Chinese customers at all or with Chinese buyers only accounting for a small portion of the long-term contracts used to satisfy lenders, which want to see guaranteed cash flows over decades. In that time, Chinese buyers rarely purchased more than 25% of a project's output. One exception was China National Petroleum Corp.'s long-term supply deals supporting a third train at Cheniere Energy Inc.'s LNG export facility in Corpus Christi, Texas, which accounted for about 27% of the train's capacity.

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Some in the U.S. LNG industry have already pointed to trouble for export developments that target Chinese demand. Australia's LNG Ltd. put off a target for a final investment decision for its proposed Magnolia LNG terminal in Louisiana from late 2018 to early 2019, citing trade tensions between the U.S. and China.

China put a 10% tariff on U.S. LNG cargoes in 2018 in retaliation for a 10% tariff the U.S. placed on a basket of Chinese exports coming to its shores. The U.S. tariffs were scheduled to rise from 10% to 25% on Jan. 1, 2019, before the countries called a truce to negotiate. The truce fueled optimism in the U.S. that a resolution might avoid a potential hike in tariffs on U.S. LNG.

Tsafos pointed to a flurry of contract activity for the American LNG industry in recent months. The supply deals bolstered the prospects of new export terminals, even though no U.S. company has announced an off-take agreement with a Chinese counterparty since China imposed the tariff Sept. 24, 2018.

In another view, the Atlantic Council forecast that the trade tensions and tariffs will strongly impact U.S. LNG producers, but "U.S. producers can find profitable markets in Europe, other Asian countries, and Latin America, which in turn could displace Qatari, Australian, or other suppliers, who could sell their gas to China instead."

"Hence, the impact of tariffs on U.S. firms in China would be minimal," Jean-François Seznec, a senior fellow with the Atlantic Council's Global Energy Center, wrote in a research paper. "The displacement of Qatari LNG in Europe or Latin America could actually allow the U.S. suppliers to increase their margin due to lower shipping costs."

"On the other hand, China could lose some of its ability to diversify its supplier base, risking higher costs and security of supply," Seznec said.