The U.S. China Summit ended on a positive note for U.S. LNG exports. While China runs a massive trade import deficit with the U.S., the country has signed major 20-year gas import contracts with Russia, Qatar, and Australia; the U.S. absence has been noted.
Chinese LNG Imports Receive a Presidential Push
President Trump campaigned on a promise of “fair trade” with China and creating U.S. jobs through infrastructure projects. The U.S. Commerce Secretary, Wilbur Ross, has clarified the U.S. position that LNG exports are a path to the U.S.-China trade balance. Both state and private sector investors are welcome. Herein lies an opportunity for U.S.-China trade relations. The U.S. pledge to remove impediments to Chinese state-sponsored investments is a political gesture of goodwill. Should China reciprocate, large-scale Chinese investments would be a statement of priorities, and an alternative to holding U.S. treasuries.
Energy is an Instrument of State as Well as One of Commerce
Energy is never an entirely economic transaction. Japan and Korea have offered to increase investments in U.S. LNG as a means to ease trade friction. Korea’s new administration has confirmed the national goal of cutting coal powergen 50 percent as early as 2020 and increasing LNG imports to fill the gap. Japan has $30 billion invested in U.S. LNG and has joined Korea in announcing an increase in these commitments. China runs a $347 billion dollar trade deficit with the U.S. Trade surplus nations have enjoyed a favored status, a legacy of the Cold War that is coming to an end. Balancing trade, managed or not, is the new political reality.
U.S. LNG can solve a second pressing Chinese concern, urban air pollution. Mortality rates from coal burn and diesel pollutants are forcing China to reconfigure their energy slate. China has begun replacing coal with gas powergen and moving it out of urban areas. China intends to wheel 100 GW of Mongolia coal-fired powergen thousands of miles to the urban areas of the east. London banned the burning of coal within city limits in 1952, within five years the air had cleared. A similar state mandate restricting coal burn and diesel could usher in a gas import boom.
Central Asian Gas Pipelines to China
China already has a geographically diversified LNG supply chain. In addition to Qatar, Australia, Malaysia, and Indonesia, China has an agreement with Russia’s Gazprom to bring 3.8 billion cubic feet per day (Bcf/d) of gas from Central Siberia to the cities of North East China. The Turkmen Galkynysh field currently exports two Bcf/d to West China and is capable of significant expansion. China will play the giant Turkmen gas field against Russia’s Siberian reserves, then balance these Central Asian imports against global LNG and domestic production.
New LNG Buyers Emerging in China Need State Support
China also faces additional internal pressure to allow imports of LNG. Industrials and munis are seeking independence from incumbents and want to source their own fuel supply. These include distributors such as ENN Energy, Hanas, and conglomerates like JOVO. Importing LNG to coastal cities is cheaper, and requires less CapEx for infrastructure, than contracting for either domestic or foreign pipegas.
Financing a large scale transfer of fuel consumption from coal and diesel to natural gas will require regulatory direction. Policy makers will need to mandate a shift to clean fuels and open infrastructure access. Secular growth in Chinese LNG demand will require a full commitment on the part of the state and a five-year plan that commits to clean air as a public good. Chinese imports of U.S. LNG will benefit both nations, working toward alleviating trade tensions and allow China a low-cost source of clean fuels.
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March 5, 2024
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