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Wood Mackenzie and Verisk Maplecroft comment on the impact of Trump’s Asia visit

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LNG Industry,

As Trump begins the Beijing leg of his Asia trip, Wood Mackenzie and Verisk Maplecroft analysts have commented on the potential impact of the visit:

Kerry-Anne Shanks, Head of Asia gas and LNG, Wood Mackenzie

The Trump administration has been championing US energy exports as its preferred instrument for narrowing its trade deficit in the wake of the US shale boom. A combination of rising export capacity in the US, LNG import demand growth in China, and political cheerleading has underpinned an uptick in 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. 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.

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. We would not be surprised if the trip results in several non-binding agreements with US operators for LNG supply. Any deals that are inked will most likely be in the form of a memorandum of understandng (MOU) rather than a concrete sales purchasing agreement (SPA). Such an arrangement would be politically expedient, yet give Chinese buyers the option to quietly back away from the deal down the line.

On China's end, demand for LNG is growing. We estimate that demand could reach 330 billion m3 by 2020, up from 206 billion m3 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% in 2016 to 8 – 10% 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.

Hugo Brennan, Asia analyst, Verisk Maplecroft

The economics of US supplies to China may be challenging and Chinese LNG buyers might find cheaper deals elsewhere. Making a commitment to US LNG means exposure to US gas prices, which may not be that attractive to buyers in China. Liquefaction and shipping from the US to China involve large fixed costs. US 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 US gas market means that LNG developers can offer more volume flexibility than is typical. Moreover, US 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 US imports could help ensure that Beijing does not become too dependent on any one state. US 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. Verisk Maplecroft’s Government Stability – Projections Index, shows that nine of China’s thirteen largest import partners are categorised as either high or medium risk. Meanwhile, the US is considered low risk and outscores China’s 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.

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