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Trade war

US shale risks becoming next casualty in China trade spat

Beijing's LNG tariff to shift energy flows as buyers and sellers seek options

A tanker carrying American shale gas passes seals on a buoy at Grangemouth, Scotland. The U.S.-China trade conflict is rerouting trade patterns.   © Reuters

TOKYO -- With China about to slap a retaliatory tariff on American liquefied natural gas, the U.S. shale gas industry stands to be cut off from its third-biggest export market, casting a shadow over its growth.

The 10% duty that China plans to impose on Monday will not have a significant impact on the country's LNG purchases. Imports of the fuel are surging under Beijing's campaign to wean the country off coal, and China became the world's second-largest importer behind Japan in 2017. Imports from the U.S. jumped sixfold on the year, yet they accounted for less than a tenth of the total.

The LNG levy is part of a package of tariffs on $60 billion worth of U.S. imports to be imposed by Beijing in response to a third round of American duties that the Trump administration plans to unleash that day.

China has many other suppliers it can turn to. Qatari state-owned Qatargas said Sept. 10 it has signed a 22-year deal to supply LNG to a subsidiary of PetroChina.

Russia can export more as well. Next year's opening of a gas pipeline connecting eastern Siberia and China will increase LNG supply from the Arctic, says a researcher at Japan Oil, Gas and Metals National Corp.

In contrast, the U.S. is certain to suffer a drop in LNG exports to China, which accounted for 15% of its total in 2017. Now American companies are turning to Europe as an alternate market.

Earlier this month, Venture Global LNG announced a 20-year supply agreement with Spanish oil company Repsol. Cheniere Energy, another American company, has signed a 15-year deal with Swiss energy and commodities trading house Vitol.

With the ranks of both exporters and importers increasing, this game of musical chairs is likely to continue. The U.S.-China trade war may rearrange flows completely, Dave Ernsberger of S&P Global Platts says.

LNG prices in Asia are likely to remain largely unaffected for now. Spot prices in the region stand at around $12 per million British thermal units, the highest in nearly four years.

"China is building up inventories early ahead of the winter, so the tariff won't have much impact in the short term," said Mikiko Tate, senior analyst at Sumitomo Corp. Global Research.

"It only means U.S. exports will go somewhere other than China," a trader in Japan said.

Market observers are focused on what this change will mean in the long run, as LNG production and exports require massive investments. A prolonged trade conflict will discourage Chinese investment in American facilities.

The LNG tariff could undermine U.S. competitiveness and boost projects in places like Russia and Qatar, Samuel Phillips of Barclays said. If it is unable to serve China's voracious appetite, the U.S. shale gas industry will lose significant opportunities.

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