Global Investing Hot Spots

Trump's China trip is a test for US natural gas exports and his 'America First Energy Plan’

Key Points
  • President Donald Trump's trip to Asia presents an opportunity to firm up agreements to ship U.S. natural gas to China.
  • U.S. shipments of liquefied natural gas to China are rising this year, but American firms haven't signed long-term contracts with Chinese buyers.
  • Analysts say the United States faces obstacles to cracking the Chinese LNG market, including competition from entrenched rivals.
President Donald Trump and China's President Xi Jinping leave after an opera performance at the Forbidden City in Beijing, China, November 8, 2017.
Jonathan Ernst | Reuters

President Donald Trump's entourage on his trip to Asia includes a pair of natural gas executives, a sign that the White House is eager to build on progress earlier this year to ship more of the fuel to China.

Natural gas demand in China is rising and poised to boom in coming years as the world's second-largest economy aims to reduce its reliance on coal-fired power. The Trump administration is making it a priority to assure U.S. companies scoop up a significant share of the business.

In May, the U.S. Commerce Department and Beijing reached an agreement that will allow Chinese firms to strike long-term contracts with American producers of liquefied natural gas.

U.S. capacity to process LNG, or natural gas cooled to liquid form, is set to grow nearly seven-fold by 2019 as five export terminals open. Exporting more of that LNG is a central pillar of Trump's plan to achieve "energy dominance."

The United States will have to compete with Qatar, Malaysia and Australia, which dominate global LNG sales, as well as Russia, which ships gas to China by way of pipeline. But there are signs that there's room for American suppliers in the fastest-growing market for LNG.

American LNG shipments to China are rising this year, according to a report from the U.S.-China Economic and Security Review Commission. The U.S. shipped $139 million of LNG to China in the first seven months of this year. That tops last year's total U.S. LNG exports to China of $137 million.

The opportunity exists because U.S. transport costs to Asia are low right now, and Asian LNG prices have fallen to the weakest level in more than a decade.

That is encouraging China to buy natural gas instead of coal. China's five-year economic plan calls for the country to use less coal and more natural gas to generate power.

Despite the recent gains and the agreement with Trump, Chinese buyers are still only purchasing U.S. LNG from third parties in short-term spot trades. And there is currently only one company, Cheniere Energy, capable of exporting large shipments of LNG from the United States.

Cheniere CEO Jack Fusco and Texas LNG Chief Operating Officer Langtry Meyer are joining the Trump delegation. The companies did not respond to questions about their agenda in China, but energy research firm Wood Mackenzie said securing commitments is likely at the top of Trump's list.

"The fact that Trump will arrive in Beijing with a large business delegation in tow, including a sizeable contingent from the energy sector, indicates that the White House is looking to secure concrete commercial agreements from the upcoming trip," Kerry-Anne Shanks, head of Asia gas and LNG at Wood Mackenzie, said in an email briefing on Tuesday.

Chinese natural gas demand could grow from 206 billion cubic meters last year to 330 billion cubic meters in 2020, according to Wood Mackenzie. The firm expects LNG to account for about a third of China's growing consumption through 2025.

The United States has faced some obstacles but also boasts advantages in capturing part of that growth.

On the one hand, Chinese LNG buyers can potentially find a better deal elsewhere and may not want to expose themselves to U.S. gas prices, said Hugo Brennan, Asia analyst at risk consultancy Verisk Maplecroft. There are also large fixed costs to liquefying and shipping LNG from the United States, and American companies will have to contend with lower-cost LNG expansions in Qatar and Australia, Brennan added.

Shortly after the Commerce Department reached the agreement with China, Qatar announced plans to hike its natural gas exports 30 percent by 2024. Some analysts think China won't end up buying much LNG from the United States and will instead use the option to gain leverage over Qatar in price negotiations.

But U.S. LNG shippers can offer customers more flexibility in terms of shipment volumes, and American deals have allowed buyers to sell off their purchases to others, Brennan notes.

"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," Brennan said in a note on Tuesday.

Wood Mackenzie also flags growing cooperation between China and Russia, which can send natural gas to its southern neighbor through pipelines at a discount to U.S. overseas shipments.

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,'" the firm says. "Energy cooperation has developed into the central plank of the bilateral relationship."

Supply from China itself could also be an obstacle. China has the world's largest technically recoverable reserves of shale gas, according to the U.S. Energy Information Administration. By 2030, China could provide for about a third of its own gas needs, EIA projects.

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