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Oil, gas purchases a cornerstone to US-China trade deal

If Chinese consumers and U.S. oil and gas producers can pull it off, China will be buying lots more U.S. oil and gas this year and next, according to the terms of the "phase one" trade agreement the two countries signed Jan. 15.

According to the Office of the U.S. Trade Representative, China will purchase at least $30.1 billion worth of energy products in 2020, and at least another $45.5 billion in 2021.

While Chinese firms bought $8.5 billion worth of U.S. energy exports in 2017, according to U.S. Census Bureau trade figures, that level shrank during a two-year trade war to $4 billion in the 12 months prior to November 2019. China has committed to buying at least $52.4 billion in additional energy purchases over the two years.

The agreement left blank specific amounts for each category of energy products. Prior to the agreement, analysts speculated that crude oil would make up the bulk of the exports sold to the Chinese because of infrastructure constraints, for LNG in particular, and China's national demand profile.

"China bought roughly $4 billion of U.S. energy on a trailing-twelve-month basis through November 2019, implying a $29.5 billion gap," analysts with energy consulting firm ClearView Energy Partners LLC said. "The back-of-the-envelope market basket ... offers some sense of what it would mean to close this $29.5 billion gap with crude oil, LNG, coal and ethanol: buying a lot of it!"

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"We expect China and/or operators to announce U.S. commodity purchase arrangements in the context of tomorrow's signing," ClearView said Jan. 14. "Second, given the size of the gap, commodity purchases seem likely to be backloaded [into 2021]."

Rice University Energy and Environmental Regulatory Affairs Fellow Gabe Collins said Jan. 15 that the scale of the numbers makes him credulous that the terms can be fulfilled. "It would take one Q-Max LNG tanker leaving every day" for the U.S. to send enough natural gas to China to account for just half the energy volume called for in the agreement, Collins said. Collins said leaving specific amounts of each energy product out of the agreement gives both sides more wiggle room if it appears one or both will fall out of compliance.

"The phase one trade deal reached between the U.S. and China is a positive step forward," Mike Sommers, the president and CEO of the oil and gas industry's largest trade group, the American Petroleum Institute, said in a statement, but Sommers added there was more work to be done opening up trade with China. "We encourage the administration to stay at the negotiating table until the U.S.-China marketplace for energy trade is fully restored and all remaining tariffs are lifted."

Under the terms of the agreement, China agreed to buy more than $200 billion of additional U.S. products and services over the next two years. The U.S. will continue to levy tariffs on a large basket of Chinese goods, so the U.S. had some "leverage in the deal" in the event that China does not comply, President Donald Trump said during the White House signing ceremony with Chinese Vice Premier Liu He.

"China and the United States, with the larger picture in mind, have taken a serious approach to our differences and worked to manage them appropriately," Liu said in his remarks.

Several oil and gas executives were singled out by Trump during his nearly hourlong remarks before the signing, including Bakken Shale oil producer Continental Resources Inc. founder and Executive Chairman Harold Hamm, Permian shale oil producer Devon Energy Corp. co-founder and Chairman Emeritus Larry Nichols, supermajor ConocoPhillips Co. Chairman and CEO Ryan Lance, and LNG exporter Cheniere Energy Inc. President and CEO Jack Fusco.

China is set to become the world's biggest importer of LNG within a decade. That makes China a critical market for Cheniere, by far the largest U.S. LNG exporter, even if U.S. LNG export cargoes went elsewhere for much of 2019. Cheniere is the only major U.S. LNG exporter that has a long-term supply agreement with a Chinese buyer, Petrochina Company Ltd., which has elected to divert LNG cargoes. "The United States and China are natural partners on energy trade, and Cheniere looks forward to resuming deliveries of LNG to China," Fusco said in a statement.

Cheniere executives have maintained the company is insulated from any LNG tariffs because of the take-or-pay nature of the agreement with its counterparty. But Cheniere has acknowledged that over the longer term, finding buyers will be a challenge if the Chinese market is cut off.