Page 11 - AsianOil Week 03

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“Let’s be clear; $52.4bn over two years is a lot of energy. But neither the 5% tariff on US crude oil nor the 25% tariff on US LNG is to be reduced orremovedbyChinaunderthePhaseOnedeal,” Wood Mackenzie’s Asia-Pacific vice-chair, Gavin Thompson, commented.
“For China to massively increase imports of oil and LNG from the US while tariffs remain in place is going to be challenging,” he said.
“Consider LNG. In 2017, China imports from US were approximately 1.5mn tonnes, worth around $0.6bn,” Thompson continued. “If China is to increase the value of US LNG imports considerably as a part of this agreement, let’s say to around 10mn tonnes in 2021, then the 25% tariff would need to be either absorbed by the importing company, or passed through to the consumer. We expect that Chinese national oil companies will be reluctant to commit to large- scale purchases given this. At the same time, the next two years will also see a slower pace of gas demand growth in China, rising domestic pro- duction and the arrival of Russian pipeline gas, creating a more competitive gas market.”
What next
Some have already expressed confidence that the ambitious trading targets will pay the way for a phasing out of oil and gas tariffs. However, a fur- ther complication is the fact that much of Chi- na’s LNG demand is already tied up in long-term contracts. There is still some room for manoeu- vre, however.
“The Chinese uncontracted LNG demand is estimated to be 17mn tonnes in 2020 and 23mn tonnes in 2021; US off-takers will now be look- ing to target this market,” Thompson said. “Con- tract and portfolio suppliers with contracted supply into China and US offtake – notably Royal Dutch Shell, BP and Cheniere – could also target increasing volumes of US LNG within
existing contracts into China if agreement can be reached with key buyers, including CNOOC and PetroChina.”
Ramping up volumes of crude being traded between the US and China will also be chal- lenging. The Asian country is the world’s biggest importer of crude, but most of its refineries are configured to process heavier grades of crude than what the US is exporting from its shale plays.
Nonetheless, China was the second-largest market for US crude after Canada prior to the trade war, and there is no doubt that oil pur- chases can be ramped up. What remains in ques- tion is whether they can be ramped up enough to meet the Phase One deal’s commitments.
The immediate response this week suggests that China’s ability to meet these trading targets is in doubt. SIA Energy analyst Seng Yick Tee was among those expressing scepticism, telling Reu- ters that the energy trade target was “too aggres- sive and unlikely to achieve”.
What does seem likely, though, is that China will try. And perhaps these efforts could involve new supply deals that displace existing exporters to the Asian country, according to Chinese trade sources and analysts cited by Reuters.
The preliminary deal can be seen as a win for the US LNG industry in particular, com- ing as developers are seeking supply deals to underpin the second wave of liquefaction capacity expansion on the Gulf Coast. Such capacity would not come online until later this decade, though, so in order for China to meet its 2020-21 energy purchasing target, it would likely need to turn to the spot market or offtake deals with LNG exporters whose facilities are already operational. Any move to lower tariffs on US LNG – or remove them altogether – will help to speed up this process, and it seems that China has no time to lose.™
Week 03 22•January•2020 w w w. N E W S B A S E . c o m P11