Trump Push for Energy Dominant U.S. Blunted by China LNG Threat

(Bloomberg) -- China's threatened tariff against U.S. liquefied natural gas comes as a second wave of American export terminals seek financing with an eye toward the Asian giant's drive to reduce its use of coal.

The U.S., with its abundance of shale gas, is rapidly expanding its ability to export the fuel overseas. China, which became the world's biggest importer of the fuel in May, is seen as a key target as it pursues a strict five-year plan to shift away from smog-inducing coal for both residences and industry.

But a 25 percent tariff, retaliating for a U.S. plan to expand levies against China, could give exporters Qatar, Australia and Russia an edge in securing contacts with the world's second-largest economy as a dozen or so U.S. companies seek to build new export terminals. That's not a happy thought at a time when U.S. President Donald Trump has said he wants the U.S. to be “energy dominant.”

That agenda “will cease to exist if one of the largest energy markets in the world is preemptively placing tariffs on LNG,” Charlie Riedl, executive director of the Center for Liquefied Natural Gas, a Washington-based industry group, wrote in an email.

It's the first time LNG, a super-chilled form of natural gas that can be transported by tanker, has been ensnared by the developing trade war between the U.S. and China. It comes as part of a $60 billion response to Trump's recent statements that he plans $200 billion in tariffs against China.

If the threats are followed through on, billions of dollars could hang in the balance. Cheniere Energy Inc., Tellurian Inc. and other LNG developers have courted utilities and state-backed companies in China to justify building more terminals to ship gas abroad. Cheniere and Tellurian shares slid in New York trading Friday following China's release of its report.

As U.S. LNG projects under development compete to slash costs for their potential exports, “the 25% tariff will definitely price USA LNG completely out of the Chinese market,” said Claudio Steuer, senior visiting research fellow at The Oxford Institute for Energy Studies.

Cheniere was the first U.S. company to export shale gas overseas, starting in 2016. It's already made substantive inroads in China, a country that trails only Mexico and South Korea among the biggest buyers of U.S. LNG.

As of mid-June, China accounted for 13 percent of the exports from Cheniere's Sabine Pass terminal. The company recently gave the green light to expand its Texas export terminal thanks in part to a contract it signed earlier this year with China National Petroleum Corp.

Cheniere does “not view tariffs as productive,” spokesman Eben Burnham-Snyder said by email on Friday, describing LNG as a “win-win'' financial situation for both the U.S. and China.

Warren Patterson, commodity strategist for ING Bank NV, said Cheniere is right to be concerned. If the tariffs are implemented, China could turn to Australia and Qatar, the world's two biggest LNG exporters, to supply its needs, he said. Additionally, the tariff threat comes as Russia advances plans to begin pumping gas to China through its newly-built 2,500-mile (4,000 kilometer) Power of Siberia pipeline by the end of 2019.

Patterson said he was “quite surprised” to see LNG show up on China's tariff list. With China's aggressive move away from coal “I would have thought that the government would have wanted to ensure adequate supply,” he said in an email.

Meanwhile, Tellurian's chairman, Charif Souki, downplayed the threat. ‘'This is people posturing one way or another on both sides of the equation; it changes nothing,” Souki in an interview. “One word: gibberish. ”

China has a “very fundamental need” for LNG and U.S. gas at $2.75 per million British thermal units is a sharp discount to the roughly $10 LNG is going for in Asia, according to Souki. Tellurian is signing non-binding agreements with some of a pool of about 25 possible partners in its project, some of which are Chinese companies, Souki said.

Whether or not the tariff will deter those negotiations with the companies from China is unknown, he said.

--With assistance from Christine Buurma, Kevin Varley, Ryan Collins and Anna Shiryaevskaya.

To contact the reporters on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net;Rachel Adams-Heard in Houston at radamsheard@bloomberg.net;Ryan Collins in Houston at rcollins74@bloomberg.net

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Christine Buurma

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