Chinese threat of imposing a 25% tariff on US LNG could cause a setback for non-sanctioned US projects

September 7, 2018

Rystad Energy observes that China’s LNG demand was as at 38 million tons (Mt) in 2017, marking a 45% increase from 2016 at 26 Mt. This jump was mainly driven by increased demand in the power and residential sector as the country pursues an aggressive plan to switch from coal to gas. This trend is expected to continue, due in large part to the government policies guiding the energy mix and because domestic production and new pipelines are insufficient to meet demand. We forecast Chinese LNG demand to reach about 90 Mt by 2025. 

Of the about 90 Mt of LNG imports required in 2025, current long-term Sales and Purchase Agreements (SPAs) only cover about 45 Mt in 2025. This means 50% of China’s required LNG in 2025 is currently not secured through SPAs. We expect that China will secure most of these volumes through SPAs as security of energy supply will be important for the country’s future economic growth. But given the current turbulence in the commercial relationship between China and the US, it is likely that Chinese companies will be reluctant to sign long-term agreements with US suppliers.

An additional consideration threatening US exports is large portfolio players like BP, Shell, and JERA. These players account for 23% of contracts globally, 60% of the currently sanctioned US volumes, and supply 17% of Chinese imports. The tariffs are structured in a way that any US LNG import receives a tariff, and the portfolio players will be incentivized to prioritize the development of projects that do not represent any commercial risk. US sellers may struggle to find alternative long-term buyers for their volumes meaning that some of these projects could face delayed final investment decision or be scrapped entirely.

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