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Trade war seen threatening next US LNG export wave

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Aggressive US trade stance increases risk of LNG project delays

Other LNG-exporting countries could stand to gain

Arlington, Virginia — If trade negotiations between the US and China fail, American natural gas exporters could find themselves shipping fewer cargoes to a key market and watching a second wave of US gas liquefaction terminals suffer delay, analysts caution.

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On Wednesday, negotiations resumed in Washington between officials of the two countries, as China's threat to impose a 25% tariff on US LNG remained a cause for uncertainty for the American gas export industry. China made the threat in early August against LNG and other products in response to the Trump administration's announcement of proposed tariffs on a list of $200 billion of Chinese imports.

Should trade representatives "fail to navigate a stalemate, US natural gas producers and exporters will be the next victims in the administration's war on trade," wrote Matthew Hong, director of power and gas research at Morningstar, on Wednesday.

LNG SECOND WAVE

"In the short term, US producers and exporters may be shut out of the second-largest market for LNG, especially going into the high-demand winter months," Hong continued. "In the long term, a prolonged conflict could delay final investment decisions on second-wave LNG projects, forcing US suppliers to miss out on what is expected to be a tighter market in 2020. In an ideal world, cooler heads would prevail and both parties would agree to suspend the escalating trade war, but recent history has shown the conventional outcome is the less likely."

The possibility of an LNG tariff sent a chill through the US LNG industry because China, with its intense demand for LNG as it tries to curb air pollution from coal combustion, is seen as a source of the buyers that form the foundation of financing for multibillion-dollar US export terminal projects.

Cheniere Energy in February signed a long-term supply contract with a subsidiary of the state-run China National Petroleum, representing the first such deal for US LNG with China. That agreement led to the final investment decision for a third train at Cheniere's Corpus Christi LNG export facility.

Several US LNG terminal projects that have received federal approval but await a final investment decision require similar long-term contracts. But an aggressive US trade stance increases the risk of delays, Hong wrote. In the short-term, US shipments to China could decline or stop, even though a tariff would be unlikely to lessen the country's demand for LNG.

"Chinese buyers with agreements in place to purchase US LNG may swap their contracts with other counterparties to avoid paying additional fees or outright cancel them," Hong wrote, referring to short-term contracts.

"In the short-term they could do this until the economics flip and it makes sense even with the higher tariffs to import US products," Hong said in an email.

From Cheniere's first export from the Sabine Pass export terminal in February 2016 through June, China has received the third-greatest volume of US LNG of any country, according to US Department of Energy figures.

OTHER OPTIONS FOR CHINA

But LNG from the US is a small share of China's overall LNG imports. In a trade dispute between the US and China, other LNG exporters such as Australia and Qatar stand to gain ground. American Petroleum Institute Director for Tax Policy Stephen Comstock testified about this at a Tuesday hearing on tariffs held by the Office of the US Trade Representative in Washington.

"This trade dynamic suggests that additional tariffs by the Chinese on US LNG will hurt the U.S. more than it hurts China and naturally incentivize other LNG suppliers to fill this market," Comstock said. "This could impact the construction of domestic LNG projects looking to capture Chinese market, which could cascade into reductions in domestic natural gas production."

-- Corey Paul, S&P Global Market Intelligence, newsdesk@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com