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US-China deal could significantly alter the global LNG trade

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LNG Industry,

Wood Mackenzie has stated that the recently announced 100-day action plan between China and the US has the potential to alter the global LNG trade, opening the door of the world’s largest LNG growth market to the world’s fastest growing LNG supplier.

The US Commerce Department said that the action plan falls under the framework of the US-China Comprehensive Economic Dialogue, and allows Chinese companies to negotiate long-term contracts to source LNG from US suppliers.

Massimo Di-Odoardo, Head of Global Gas and LNG research at Wood Mackenzie, said: “The wider agreement represents a win for both sides. It allows President Trump to deliver on his pledge of redressing global trade imbalances and China to show its commitment to becoming an equal trade partner.

“Until now Chinese buyers have not bought long-term LNG supply from the US directly. This ensures US LNG entering the Chinese market will be politically palatable.”

“The agreement connects the US, the fastest growing LNG supplier, with China, the largest LNG growth market. By 2030, we expect Chinese LNG demand to reach 75 million tpy, triple 2016 imports. This is equivalent to US$26 billion a year at today’s prices (US$7/million Btu), and the US is keen for a slice of the pie.”

Di-Odoardo added that US LNG has already been exported to China, and in March 2017 accounted for 7% of total LNG imports. China’s total LNG demand in 2016 was 26 million t.

He said: “In the longer term, the deal paves the way for a second wave of investment in US LNG. Developers will now be able to target Chinese buyers directly, potentially supporting project financing. It could also support direct Chinese investment into liquefaction and upstream developments on US soil.”

He noted that the agreement confirms the Trump Administration’s commitment to increasing LNG exports. However, it also increases pressure on competing suppliers, such as new LNG projects in Australia, Canada and East Africa, as well as pipelines and LNG projects in Russia. It also undermines the niche that portfolio players, including Shell, Total and BP, have found in acting as a middleman between Chinese imports and US LNG exports.

Di-Odoardo concluded: “But ultimately, whether Chinese buyers line up for a second wave of US LNG will depend on its competitiveness versus other global alternatives and Chinese buyer appetite for exposure to US gas prices.”

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