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Potential tariffs rollback stirs hope among US LNG exporters

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Potential tariffs rollback stirs hope among US LNG exporters

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New projects impacted by Chinese duties

Commercial talks continue in run-up to eventual deal

Houston — US LNG export developers welcomed a statement by Chinese officials Thursday that Washington and Beijing have agreed to roll tariffs back on one another's goods incrementally as the two sides continue to negotiate towards a trade deal.

The apparent progress toward ending the protracted trade war between the world's two biggest economies comes as some developers of liquefaction terminals along the Gulf, Atlantic and West coasts continue to struggle to secure sufficient offtake deals to advance their projects.

There has been an overall uptick in 2019 in commercial activity, with NextDecade, Venture Global, Tellurian and Cheniere among the developers that have announced long-term agreements tied to new supply.

Only two final investment decisions have been reached among more than a dozen active US projects, however, during a year that was expected to be critical because of the length of construction and efforts to meet global demand in the early to middle part of the next decade. A third FID was made on a new train at an existing facility.

And while the trade tensions are not the sole reason for the relative dearth of FIDs, a resolution would go a long way in bolstering those projects that remain on the bubble.

"The banks are still insistent on long-term contracts, long-term agreements, with creditworthy investment-grade counterparties in order to get financing, so China represents a big pool," Fred Hutchison, president and CEO of industry trade association LNG Allies, said by telephone. "That's why our companies have continued over the last 18 months to have robust conversations with Chinese counterparties. It's just clear they haven't been able to move forward in the current standoff."

Within a decade, China is expected to become the world's biggest importer of LNG. Even before then, the US could become the world's biggest exporter of LNG.

MARKETS MEET

That's why it was natural for US project developers to court Chinese end-users for offtake deals. Among the first wave of projects, only Cheniere has a long-term agreement with a Chinese counterparty -- state-owned China National Petroleum Corp.'s PetroChina unit. Since China imposed a 10% tariff on imports of US LNG in the fall of 2018 and increased the duty to 25% earlier this year, no new offtake agreements between the two sides have been announced. And, since March, no US cargoes of LNG have been delivered to China.

"Any movement in resolving the current US-China trade dispute is welcome news for the LNG industry," Hutchison said.

The statement Thursday by China's Ministry of Commerce did not specify a timeline for the canceling of any tariffs, nor did it provide details on which tariffs would be rolled back first. And, there remains the possibility the talks could fall apart. For the time being, Wall Street investors cheered, sending the overall stock market up sharply. In the LNG space, shares of Cheniere rose, while NextDecade, Tellurian and Sempra fell.

COMMERCIAL DIALOGUE

Notwithstanding the current impasse, US project developers have continued to engage with Chinese counterparties -- as well as other buyers in East Asia.

Greg Vesey, CEO of LNG Limited, which is developing the Magnolia LNG project in Louisiana, traveled on a US-led trade mission to the region this week. A spokesman declined to say Thursday whether Vesey was meeting with any Chinese counterparties during the trip through Thailand, Indonesia and Vietnam.

Meanwhile, Cheniere CEO Jack Fusco met Tuesday in Shanghai with CNPC Chairman Wang Yilin. The two sides discussed furthering cooperation in the LNG sector, according to a caption on a photo of the two men posted on CNPC's website. Cheniere has previously said its two existing long-term deals with PetroChina are secure, and producing revenue.

The ongoing engagement efforts are aimed at being ready with deals that can be signed as soon as the LNG tariffs end. It's not just the LNG industry that is watching, either -- the trade war has also affected other energy sectors, including oil and petrochemicals.

During a conference call with analysts Thursday to discuss Energy Transfer's latest financial results, Chief Operating Officer Matthew Ramsey addressed the effect on the midstream operator's ethane expansion efforts.

"We are in dialogue with a number of companies and a number of countries," Ramsey said. "If you focus at the largest market in the world at China, as we know the tariff issue has kind of put things on hold as far as finalizing deals, but it hasn't put on hold discussions, negotiations and ongoing opportunities to expand our ethane export capability and we do expect that to happen."

--Harry Weber, harry.weber@spglobal.com

--Edited by Joe Fisher, joe.fisher@spglobal.com