Trump visits Beijing championing LNG exports, Alaska signs deal with China

Chinese LNG demand could reach 330 bcm by 2020, up from 206 bcm in 2016

The Trump administration has been championing U.S. energy exports as its preferred instrument for narrowing its trade deficit in the wake of the U.S. shale boom, according to Wood Mackenzie.

A combination of rising export capacity in the U.S., LNG import demand growth in China, and political cheerleading has underpinned an uptick in U.S. LNG exports to China this year via third party, spot trades.

An action plan agreed between Trump and Xi Jinping in May 2017 welcomed Chinese entities to buy US gas and enter into long-term supply deals with American operators.

Alaska Governor Bill Walker signed a five-party joint development agreement (JDA) for the Alaska LNG project. This historic signing is the most significant step toward finally monetizing Alaska’s vast resources of natural gas.

The joint development agreement was signed by the State of Alaska, AGDC and three of the largest Chinese energy and finance companies—Sinopec, Bank of China and China Investment Corporation.

• Sinopec, one of the largest oil and gas companies in the world, generates $456 billion in annual revenue.
• Bank of China is one of the five largest banks, with clients in more than 50 countries and regions.
• With an estimated $813.5 billion, China Investment Corporation is the world’s third largest sovereign wealth fund.

“Alaskans need well-paying jobs and affordable energy to power our homes, schools and businesses, this Alaska LNG project is critical. The gasline is key to building a Stronger Alaska. I thank President Trump for the full support he and his administration have shown for this project, as it brings the United States one step closer to energy dominance,” said Governor Walker.

President Donald Trump and President Xi Jinping were present for the signing ceremony at the Great Hall of the People, underscoring the international importance of the agreement.

“When President Xi visited Anchorage six months ago, he shared with me his desire for deepening the mutually beneficial ties between China and Alaska. I thank him for expediting that vision to reality. I especially thank Commerce Secretary Wilbur Ross and his team for their strong belief in the Alaska LNG project, and all of the hard work they put into making this day happen,” said Walker.

It was the clearest signal to-date of the two leaders’ mutual support for increasing bilateral LNG trade, although China’s importer have yet to commit to long-term supply directly from US projects.

On China’s end, demand for LNG is growing, Wood Mackenzie estimated that demand could reach 330 bcm by 2020, up from 206 bcm in 2016.

Underpinning this uptick is the government’s aim to increase the role of natural gas within the country’s energy mix from 6 per cent in 2016 to 8-10 per cent by 2020.

This policy objective is driven by Beijing’s attempt to shift towards a greener economy that is fuelled by a cleaner energy mix.

China’s rapidly growing demand will be met by a combination of domestic supply, pipeline imports and LNG. Wood Mackenzie estimates that LNG will capture a third of China’s gas demand growth out to 2025.

 The economics of U.S. supplies to China may be challenging and Chinese LNG buyers might find cheaper deals elsewhere. Making a commitment to U.S. LNG means exposure to U.S. gas prices, which may not be that attractive to buyers in China.

Liquefaction and shipping from the U.S. to China involve large fixed costs. U.S. LNG developers also have to compete with the threat of lower cost expansions in Qatar and Australia, the current LNG export giants.

However, the deep and liquid nature of the U.S. gas market means that LNG developers can offer more volume flexibility than is typical.

Moreover, U.S. supply deals have been sold without destination restriction, allowing buyers to sell-on their purchases when and where the economics makes sense. These benefits could be attractive to Chinese players seeking to grow their global LNG position.

China aims to maintain a well-diversified portfolio of gas suppliers and U.S. imports could help ensure that Beijing does not become too dependent on any one state. U.S. supplies could help reduce China’s reliance on gas imports that transit strategic chokepoints, most notably the Strait of Hormuz and the Strait of Malacca.

Meanwhile, the U.S. is considered low risk and outscores Beijing other gas suppliers in the index, suggesting that there is less potential for political instability to impact gas production or supply over the long term, according to Wood Mackenzie.

Most notably, U.S. suppliers face stiff competition from Russia. Despite the existence of latent pressure points, Sino-Russian ties have warmed considerably under Xi Jinping and there is a deal of synergy between Moscow’s ‘Pivot to Asia’ and Beijing’s ‘Belt and Road Initiative’.

Energy cooperation has developed into the central plank of the bilateral relationship.