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LNG Deal Fuels Hopes for U.S.-China Trade

November 16, 2020

Three days after the U.S. presidential election, Foran Energy Group, an independent Chinese company, signed a non-binding agreement with U.S. company Cheniere Energy Inc. to purchase six cargoes of LNG from 2021-2025. One week later, long after many other countries, the Chinese government finally congratulated President-elect Joe Biden very cautiously, though President Xi Jinping has yet to express any personal wishes.

As a result of the trade war, China had not purchased any LNG from the U.S. since May 2019. China resumed LNG imports from the U.S. in March 2020 to comply with Phase One of the U.S.-China trade deal, signed in January 2020. In the first nine months of 2020, China imported 1.42 million tons of U.S. LNG, amounting to $416 million. According to Chinese customs figures, China's imports from the U.S. in the first quarter of 2020 represented a major increase from the 258,955 tons imported in the first quarter of 2019, but nonetheless amounted to a major decline from 2018 import figures of 2.15 million tons. Foran and Cheniere currently are working out the terms of a binding agreement.

China's LNG purchases are still well below agreed targets for the first phase of the U.S.-China trade deal, which are supposed to involve purchases of $52.4 billion in energy products, including LNG, by 2022. China's imposition of a 25% tariff on U.S. LNG is one obstacle, but the Chinese government waived the tariff for 2020 imports. China began importing U.S. LNG in 2011 and the Chinese market represents a growth opportunity for U.S. producers. Although in the near term, China is unlikely to meet its commitments to import energy from the U.S., the recent creation of a new midstream entity, PipeChina (China Oil & Gas Piping Network Corporation), will facilitate LNG imports, including from the U.S., in the future.

LNG producers see China as a lucrative market because it is the second largest importer of LNG after Japan. However, this all may change if the Chinese government succeeds in meeting its pledge to become carbon neutral by 2060, as Xi Jinping outlined at the United Nations in September 2020. If implemented, this would require a fundamental reorientation of China's energy policy away from fossil fuels, particulary coal, but also oil and gas. Currently, China gets just 15% of its energy from sources other than fossil fuels. To be carbon neutral in 2060, this would need to change to more than 50%, requiring major changes in China's energy mix.

Where's the Risk?

China's Risk

China's major state-owned oil companies are forecasting a 10% increase in gas imports in 2020-21 over the previous year, when economic activity retracted due to the COVID-19 pandemic. As the Chinese economy recovers, LNG imports are scheduled to to increase to record levels, with China potentially overtaking Japan as the leading importer of the fuel by 2022.

Increased LNG imports also facilitates the Chinese government's goal to switch from coal to gas fuel in 7 million homes in northern China in an effort to meet air pollution targets. In 2017-18, this policy led to fuel shortages and backtracking on coal use, until sufficient gas supplies could be guaranteed. While encouraging the use of gas will help China meet targets to reduce emissions of PM2.5, the policy will also make the country more dependent on fuel imports, while coal is plentiful at home.

Global Risk

Globally, countries face two types of risks from China's LNG imports. One is overdependence on the Chinese market. This is a particular concern for leading exporters such as Qatar and Australia, which is in the midst of its own trade war with China. Last spring, after the Australian government urged the UN to launch an independent inquiry into the origins of COVID-19, Chinese authorities angrily retaliated by blocking many Australian imports, including barley, coal, cotton, and lobsters. China is also investigating Australia for dumping inexpensive wine onto the Chinese market. Thus far, the mutually lucrative China-Australia LNG trade, amounting to $17.4 billion annually, has not been affected, though Woodside Australia Petroleum's negotiations to sell a stake in LNG fields in Western Australia to PetroChina and other Chinese firms have stalled.

Countries seeking to expand their gas exports to China, such as the U.S., Russia, and Saudi Arabia, see China's climate pledge as a threat to their plans. Russia's gas pipeline, Power of Siberia, just began pumping to China last year and a second pipeline to transport Russian gas to China is being discussed. China is also a key investor in Russia's Arctic Yamal LNG projects, importing 3 million tons annually. With a 30-year contract to sell gas to China, the Russian government was taken by surprise by Xi's pledge to achieve carbon neutrality by 2060, and several Russian officials downplayed China's ability to achieve the target.

The second risk from China's LNG imports is to the global climate. While portrayed as a bridge fuel, LNG is mostly methane, and therefore also contributes to global greenhouse gas emissions. While an improvement on even more harmful fossil fuels, the production of LNG itself involves additional emissions. Although switching from coal to gas, as China is seeking to do, would reduce emissions substantially, the reductions would not be sufficient to meet Paris Agreement climate change goals.

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