Page 7 - NorthAmOil Week 03

NorthAmOil COMMENTARY NorthAmOil
Wood Mackenzie’s Asia-Pacific vice-chair, Gavin Thompson, commented. “For China to mas- sively 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 production 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- ingtotargetthismarket,”Thompsonsaid.“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.”
However, Reuters reported last week, citing sources familiar with the matter, that Sinopec
was planning to review the terms of a potential supply deal with Cheniere following the drop in LNG prices last year. No further details have emerged as yet, but this would be another com- plicating factor if China wishes to move quickly to ramp up LNG purchases.
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-larg- est 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. An SIA Energy analyst, Seng Yick Tee, was among those expressing scepticism, telling Reuters that the energy trade target was “too aggressive 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, coming as developers are seeking supply deals to underpin the second wave of liquefaction capacity expan- sionontheGulfCoast.Suchcapacitywouldnot 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 opera- tional. 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.™
Some have already expressed confidence that the ambitious trading targets will pay the way for a phasing out of oil and gas tariffs.
China will likely need to turn to the spot market or offtake deals with US LNG exporters whose facilities are already operational to meet its energy import commitments.
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