President Donald Trump's trade war with China may be just the edge Canadian LNG export developers need as they try to woo Asian buyers and siphon market share from the US Gulf Coast.
At a time when cheap and abundant US shale gas is fueling an unprecedented domestic expansion of liquefaction capacity, Chinese import demand is surging as the world's most populous nation transitions to cleaner-burning fuels to combat climate change.
That's propelled US export developers' growth projections, with boardroom discussions heavily weighted to what's happening in China. But the recently escalating trade tensions between Washington and Beijing threaten to upend that balance and potentially give the US' northern neighbor an advantage with China over US terminals currently proposed, global energy leaders said Tuesday as the World Gas Conference got underway.
"You run the risk of making those projects less competitive," ExxonMobil CEO Darren Woods said in Washington.
Canada is watching the skirmish, and it is ready to pounce.
SHIPPING DISTANCE ADVANTAGE TO ASIA
Export developers in British Columbia have long argued that shorter shipment times to Asia, which as a region imports more LNG than any other in the world, make their projects attractive when compared with Gulf Coast facilities. Shell-backed LNG Canada is preparing to make a positive final investment decision on its export project by the fall. Canada believes it is poised to be a world leader in the export of LNG.
"Will Canada's bid to find an alternate trade partner to the US benefit from this fallout? Possibly," Teri Viswanath, managing director of natural gas for S&P Global Platts Analytics, said in an interview from New York. "Keep in mind that the relatively high-cost Australian projects that now look an awful lot like the imposing infrastructure-cost stories that circulate on why Canada won't be a major LNG player were actually funded as a bargaining chip for Asia."
Woods, while still bullish on the prospects for future US exports, said that because of the US-China trade rift there are now questions that did not exist before for the LNG market.
"Right now, we're still in this turbulent time in terms of where exactly this thing lands and settles out," Woods said.
It's an especially bad time for the US natural gas industry for the US-China trade dispute to be heating up, with more than a dozen developers whose projects were expected to make up the second wave of US liquefaction mulling final investment decisions. Several of those FIDs have been expected later this year and next year. China has quickly risen to become the third-largest buyer of US LNG, despite the fact that no Chinese companies hold long-term capacity contracts at the two currently operating US LNG export facilities. China has imported roughly 170 Bcf of US-produced LNG since mid-2016, accounting for roughly 13% of total production, data compiled by Platts Analytics shows. China's share of US LNG demand, however, has grown considerably since Cheniere Energy's Sabine Pass terminal in Louisiana first began exports.
So far, the US has been an important market for Chinese LNG buyers, since a large portion of US LNG supply is traded in the spot markets due to its contractual flexibility. As Chinese LNG demand has outpaced its own long-term supply contracts, Chinese buyers have increasingly relied on spot imports from the US. As US export capacity continues to grow over the next few years, China has been expected to continue to increase purchases of US-sourced LNG.
Utilities, such as South Korea's Kogas or India's Gail, make up around 70% of the US LNG supply contracts currently in force. Broadly speaking, utilities are more likely to consume the gas themselves due to their inherent need to serve their domestic customers. However, that share is expected to decline to 52% by mid-2020 as more non-utility players enter the market, Platts Analytics data shows. Non-utility buyers, on the other hand, are more likely to be operating in the spot markets. Therefore, the expansion of non-utility capacity suggests that US spot cargo sales are also likely to increase over the next few years.
The market has expected Chinese firms to pick up long-term offtake contracts in the second wave of US LNG export projects.
CANADA NO LONGER SEEN AS TOO EXPENSIVE TO EXPORT LNG
However, the US is not the only country in North America vying for a spot at the table. Canada has 14 export projects proposed for its western coast, and there are three export projects proposed on Mexico's Pacific Coast.
In the event of a protracted trade war between the US and China, exports from Canada become particularly attractive since the supply gas will be entirely sourced from Western Canadian shale, whereas prospective LNG exports from Mexico would still need to source their supply gas from the US.
This creates somewhat of an advantage for Western Canadian LNG projects, which were long-considered too expensive to compete with cheaper Gulf Coast projects.
"My message to you is Canada is open for business and open for trade," Jim Carr, Canada's minister of natural resources, told buyers from around the world at the conference, in a not-so-subtle swipe at the event's host country. "It supports what you do and the way you do it."
