Houston — Former US Secretary of State Rex Tillerson warned the Trump administration Wednesday not to underestimate the ability of the Chinese government to absorb the pain from an escalating trade war with the US that has roiled energy markets.
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Part of Washington's calculus since tensions between the world's two biggest economies began in 2018 was that Beijing would be motivated to make a deal quickly, partly because of the heavy strain tariffs impose on its ability to export and import goods and services, including natural gas.
With no comprehensive deal in sight, and the US now in trade disputes on multiple fronts, including with key partner Mexico, that bet is being challenged.
In May, China raised duties on imports of US LNG to 25% in response to US increases in tariffs on Chinese goods.
Tillerson, who spent a decade at the helm of ExxonMobil before joining the State Department, told a KPMG energy conference in Houston that Beijing is showing it won't roll over, and suggested Washington pay attention.
"The Chinese I hope don't come to the realization you can't make a deal with this administration, and will just wait for the next one," Tillerson said. "They have the capacity to manage that for a period of time."
For the US, the promise of a surge of new US LNG export development, due to government efforts to speed up permitting, is being threatened by the trade war. Within a decade, China is expected to become the world's biggest importer of LNG, and as such is a critical market for US liquefaction projects.
While developers of new liquefaction facilities can get approval to build more quickly if regulatory burdens ease, they may not secure financing for the billions of dollars it costs for those facilities if tariffs prevent buyers from signing contracts.
Financing is already a challenge for many of the second-wave projects being proposed in the US.
During a panel discussion at the conference, Lance Goodwin, vice president of business development for Freeport LNG, said pressure from buyers for shorter, more flexible terms and use of international indexes to structure new offtake contracts is making it difficult for some developers to sign deals. That is causing projects to take risks they may regret later, he said.
"I worry a bit about project developers that are pushing the limits of project finance, and banks that are willing to lend to those projects, and projects ultimately failing and impacting lending to other projects," Goodwin said.
He declined to say which US projects concerned him the most.
Freeport LNG's terminal in Texas is preparing to start up the first of three liquefaction trains. It also is trying to commercialize a proposed fourth train at the site.
The operator had previously said it expected liquefaction to begin in April or May, with the first cargo ready to load in July. At the conference, Goodwin said he expects the first commissioning cargo to be shipped in August.
Current events on the demand side are also pressuring US developers. Japan, currently the world's largest LNG importer, faces the potential of being overcommitted to LNG offtake. This is due to the restart of nuclear facilities and new sources of energy that are being developed at home, said Hiroki Sato, managing executive officer at Jera, a joint venture of Tokyo Electric Power and Chubu Electric Power and a major buyer of LNG.
Sato said Jera was trying to figure out how to maintain its offtake responsibilities "amid the uncertainties around demand in Japan."
"So many uncertainties. That's why what we need is very flexible volumes," he said.
Competing market forces, including volatile commodity prices, make it more important than ever that geopolitical tensions ease soon, Tillerson said. In contrast to the Trump administration's go-it-alone approach, Tillerson said multilateral trade alliances are important.
According to Tillerson, Thursday's 75th anniversary of the D-Day invasion recalls "how bad things can get in the world, and you really want your friends standing with you."
--Harry Weber, Harry.Weber@spglobal.com
--Edited by Jennifer Pedrick, firstname.lastname@example.org