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Talks between US President Donald Trump and China's Xi Jinping at the G20 summit in end-June will be insufficient to restore long-term Chinese oil and gas investment in US LNG, which has now suffered lasting damage.

Trade tensions had initially impacted spot LNG cargoes and ongoing trade flows, but in recent months concerns have become more deep-seated as the US fundamentally reshapes its dealings with China.

"China has not only paused (or shelved), pending LNG deals with the US, but it also appears to be reassessing its long-term investments in the US," Citi Research said in a note last week.

"This reassessment reflects escalated trade tensions, a recent slowdown in Chinese gas demand prompting a more extensive debate on China's long-run gas demand growth, and the potential reexamination of Sino-US relations," Citi analysts wrote.

The uncertainty around the Trump-Xi meeting is so high that widely different outcomes are possible, ranging from a decision to halt trade hostilities and resume negotiations, to an escalation of tensions, with the US imposing tariffs on $300 billion of Chinese goods.

But, for LNG, even the best outcome will not help reverse the loss of confidence among Chinese oil and gas companies, effectively displacing US supplies from China's energy mix for the foreseeable future.

NO FREEDOM MOLECULES

China accounted for more than 50% of global LNG demand growth between 2015 and 2018, and the bulk of growth in its LNG imports was from the spot market, dominated by US LNG.

China is set to become the world's largest LNG importer by 2024, according to the International Energy Agency, and the US is set to be the largest source of new LNG supply. It makes economic and logical sense for them to trade.

But this is no longer guaranteed, and due to the sheer volumes involved, spot market liquidity and flexibility could be stretched to its limit to match the two markets. Non-US origin cargoes already command a premium in the North Asian spot market for delivery to Chinese ports.

The flexibility of US LNG, given that it has no destination restrictions and is freely tradable, was extremely important to Chinese LNG importers given the uncertainty in domestic gas demand and the suddenness of coal-to-gas switching policies.

Chinese LNG importers will also lose out on Henry Hub-based price diversification in their portfolio, which is becoming increasingly important as the LNG market grows.

"I think there are obviously two sides here. The first is that yes, China doesn't get access to some of the least-expensive and most-flexible supply sources available globally, but also that the US sellers don't get access to the world's largest demand growth driver," Jeff Moore, Asian LNG Analytics manager at S&P Global Platts said.

He said both sides lose out because US suppliers could struggle to find other buyers of China's magnitude, but they still need to get the volumes out on the water at the end of the day, because domestic demand growth prospects within the US are pretty limited.

NO CRAZY RICH ASIANS

Chinese LNG importers like Sinopec and CNOOC, and even the smaller private gas players, were just starting to include US LNG in their long-term portfolio, along with equity stakes in US LNG terminals and upstream assets, before the trade conflict hit them in the face.

Evidence has trickled in that buying interest has now shifted to countries with lower sovereign risk including Russia, Australia and new regions like Papua New Guinea and East Timor.

US developers have always held extensive discussions with buyers outside China, but those discussions now take on greater urgency as China takes a pause, Citi analysts wrote. They said US projects that banked on China's supposed need to buy from the US now have to compete globally.

US greenfield independent projects will be more impacted than established US LNG projects such as Cheniere, Citi said, adding that Sabine Pass train 6 reaching FID is a sign that established operators can still proceed, while losing any backing from China that was widely reported to be there.

Citi said projects facing hurdles due to China's withdrawal include the Magnolia LNG export terminal, which expected FID at the end of 2018, but that date came and went.

"With Chinese interest in US LNG waning, brownfield projects, such as Cheniere's Corpus Christi Stage 3, have decided to move on despite US-China tensions, in the belief that other countries will substitute for Chinese demand," the bank said.

Chinese investment in North American energy assets has faced hurdles in the past, such as CNOOC's Nexen acquisition nearly a decade ago, and US attempts to block upstream deals on national security grounds.

It will take a significant amount of confidence building before it returns this time.

-- Eric Yep, eric.yep@spglobal.com

-- Edited by Norazlina Jumaat, norazlina.jumaat@spglobal.com