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Cheniere, Sinopec in talks for long-term LNG supply contract: source

Singapore — US-based LNG exporter Cheniere Energy is in talks with China's state-run Sinopec about a long-term LNG supply agreement, with the parties awaiting further instructions from government authorities, a source with knowledge of the matter said.

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The source, who did not want to be named, said Cheniere had been in talks with Sinopec "for some time," but declined to provide further details on the size of the potential deal or which government was holding back with any approvals.

The Wall Street Journal reported Sunday that Cheniere is expected to sign an $18 billion supply agreement with Sinopec that could be announced as part of a broader US-China trade deal at a summit between US President Donald Trump and Chinese President Xi Jinping at the end of March.

The agreement would add to Cheniere's three existing contracts with Chinese buyers -- two long-term contracts with China National Petroleum Corp. (CNPC) and a short-term contract with CNPC, the source said.

The deal could also include financing from state-owned Chinese banks for Cheniere's export capacity expansion, the WSJ said, citing people familiar with the matter.

IMPACT ON TRADE FLOWS

The Sinopec deal, if it goes through, will mark a cessation in trade hostilities between Beijing and Washington that has blocked flows for a range of commodities such as crude, LNG, LPG, soybeans and coal.

Before the US-China trade war began, Cheniere announced two LNG sale and purchase agreements with CNPC in February 2018 under which CNPC's PetroChina International subsidiary would purchase around 1.2 million mt/year of LNG, with a portion of the supply beginning in 2018 and the balance starting in 2023.

The agreement would last through 2043 and the purchase price would be indexed to the Henry Hub price plus a fixed component, according to Cheniere.

The Chinese ministry of commerce had announced retaliatory tariffs on US imports that included a 10% tariff on LNG, effective September 24, 2018. Before the tariff, China was taking nearly 15% of US LNG cargoes, but after the tariffs were imposed only three or four cargoes have reached China.

While the tariffs impacted ongoing trade flows, wider differences between Beijing and Washington meant that Chinese investment in US LNG projects and long-term offtake agreements also took a hit.

Chinese buyers have been unofficially barred from signing long-term agreements with US LNG projects since the trade war began, an executive who was part of the Trump administration's trade delegation to Beijing in 2018 said last week.

Unipec, Sinopec's trading arm, has been looking to grow its LNG trading profile and started talks with potential suppliers in 2018 on long-term contracts starting in 2023. It has an LNG trading desk in Singapore that trades around 2-3 million mt/year of LNG, and plans to grow the volume to 10 million mt/year in the coming years, in line with its expanding crude trading activities.

POSSIBLE THAW IN RELATIONS

A trade agreement may also include assurances about Chinese purchases of US LNG over a three-to-six year period.

US LNG developers have been eager to see a thaw in tensions, enabling offtake agreements that could boost new US projects.

"The specifics of what may be agreed upon ... may be less important than a return to where we were before this all started about a year ago -- building up those long-term relationships which allow added long-term contracts," said Fred Hutchison of the trade group LNG Allies.

Edward Chow, senior associate at the Center for Strategic and International Studies, said the purchase of LNG was always low-hanging fruit for both sides in the trade talks, given that the US in the next year or two will become the greatest source of incremental LNG supply and China is the biggest destination for incremental LNG demand.

"The question is whether the turmoil that the Trump administration has created in terms of the bilateral trade and investment relationship will have a longer term negative impact of causing Chinese investors to worry about political risk in the US," he said. "Maybe they'll purchase some, but maybe they won't invest."

There may be a wait-and-see approach following a deal, he added.

Still, an agreement could help move deals across the finishing line for projects like Liquefied Natural Gas Ltd. Magnolia LNG in Louisiana. Executives in 2018 said trade tensions delayed the signing of a long-term contract with a Chinese company. In a recent quarterly report, LNGL said discussions with "select Asian counterparties" progressed substantially "despite uneven traded discussion rhetoric."

Charles Riedl of the Center for Liquefied Natural Gas said: "A full elimination of the tariff [on US LNG] should help trade start to normalize, but the long-term negative effects from this dispute remain unknown."

(Corrects source attribution throughout.)

-- Analysis by Daisy Xu, newsdesk@spglobal.com

-- Oceana Zhou, Eric Yep, Maya Weber, newsdesk@spglobal.com

-- Edited by Geetha Narayanasamy, newsdesk@spglobal.com