TOKYO -- The U.S. and China seemed like a good match, at least in terms of liquefied natural gas supply and demand. Beijing was determined to clean up its smoggy air by shifting away from coal, and America had LNG to sell.
Then the trade war broke out.
The tariff battle has touched off a domino effect in the energy industry, with major geopolitical implications far beyond the world's two biggest economies.
China became the second-largest importer of LNG last year, after Japan, and in doing so shipped in 500% more of the fuel from the U.S. The volume exceeded 100 billion cu. feet, accounting for under 10% of China's total purchases, and the ratio was expected to rise further.
After U.S. President Donald Trump imposed a third round of tariffs against China on Sept. 24, however, the Chinese side hit back the same day with levies on $60 billion worth of American goods. The retaliation included a 10% tariff on LNG.
This has sparked nervousness on the street. "I'll be in trouble if the price of natural gas goes up due to the trade war," said a taxi driver in the Chinese city of Chongqing. Roughly 100,000 taxis and other vehicles in the city run on natural gas.
But Beijing does have options. It is deepening ties with a pair of countries also at odds with the White House -- Russia and Iran. Meanwhile, faced with the prospect of losing its lucrative foothold in China, the U.S. is pushing hard to sell more gas to Europe and Japan.
The new reality crystallized in September, at the Eastern Economic Forum in Vladivostok. Russian President Vladimir Putin described Chinese President Xi Jinping, who was attending the event for the first time, as the most important guest. In a show of camaraderie, the two leaders dined on Russian crepes together.
Their talks reportedly covered expanded cooperation in energy, including natural gas.
Also at the forum, state-owned China National Petroleum Corp. and Russian gas producer Novatek discussed LNG projects in the Arctic Ocean. A number of such endeavors are underway in the frigid region, and funds from China are crucial.
Yet another key project is the Power of Siberia pipeline for transporting gas from a field in eastern Siberia to China. Construction was delayed from the original plan, as China was counting on LNG from the U.S., but the momentum appears to be picking up again.
"We must complete negotiations on additional supplies before the end of this year and, before Dec. 20 next year, launch deliveries through the Power of Siberia pipeline," Russian Deputy Prime Minister Dmitry Kozak said on Sept. 17.
Chinese President Xi Jinping and his Russian host, President Vladimir Putin, show camaraderie over crepes on the sidelines of the 2018 Eastern Economic Forum in Vladivostok in September. (Getty Images)
As for Iran -- like Russia, a target of U.S. economic sanctions -- CNPC has taken over French oil giant Total's rights to part of the development of the South Pars field in the Persian Gulf, the Islamic Republic News Agency reported in August.
The field is one of the world's largest, and Iran ranks No. 1 globally in proven natural gas reserves. This does not mean the gas can be exported immediately, but the arrangement should help China prepare for a future demand surge.
Beijing's next move could be to procure gas produced in Iran and Turkmenistan through a pipeline.
China is reportedly thinking about joining a pipeline project involving Turkmenistan, Afghanistan, Pakistan and India, known as TAPI. In August, Pakistani media quoted Mobin Saulat, the chief executive of Pakistan's Inter State Gas Systems, as saying that China has expressed interest in TAPI as a complement to the Belt and Road Initiative.
For other gas producers, China is simply too large to ignore. In the coming years, the country looks destined to become the world's biggest market.
Qatar's state-owned LNG producer, Qatargas, announced on Sept. 10 that it had sealed a contract to provide PetroChina with 3.4 million tons of LNG annually for 22 years. At the end of that month, state oil company Qatar Petroleum unveiled a plan to raise its LNG production capacity to 110 million tons a year, from 77 million tons.
Australia and Canada are also eyeing opportunities in the Chinese market.
None of this bodes well for the U.S. energy industry. The trade war could undermine American competitiveness and boost projects in places like Canada, Russia and Qatar, according to Samuel Phillips of Barclays. Production and export of LNG requires massive capital investment in lengthy construction projects, and the tit-for-tat tariffs mean China is less likely to invest in U.S. developments.
Pessimism was running high at a conference hosted by the United States Association for Energy Economics, a nonprofit organization, in Virginia at the end of September. Many participants questioned the prospects for LNG initiatives in the U.S.
"For the long-term market, the consequences are likely to be felt on new supply developments," said Giles Farrer, research director at Wood Mackenzie, an energy research and consulting company. The trade war "restricts the target market for developers of new U.S. LNG projects trying to sign new long-term contracts."
Large LNG projects, worth around $60 billion, have been planned in Texas and other parts of the U.S. in anticipation of increased demand from China. Their fate is unclear.
The irony is that Trump sees energy exports as an effective tool to reduce America's trade deficits with other countries.
The shale gas revolution transformed the U.S. into a natural gas exporter. And last year, China was the No. 3 buyer of U.S. LNG after Mexico and South Korea, taking in 15% of the total exports.
As China looks elsewhere, Trump is desperate to fill the void quickly, partly to protect American energy jobs. This is where Europe and Japan come in: They appear to be making concessions on LNG to keep Trump's anger over trade imbalances at bay.
"If you look at the miners in coal, if you look at energy, LNG -- Japan just gave us some numbers that are incredible," Trump said after a summit with Japanese Prime Minister Shinzo Abe in New York on Sept. 26. "They're doubling the amount that they are going to be buying for Japan."
Boasting of his deal-making prowess, the president added: "I said, 'You have to do me a favor. We don't want these big deficits. You're going to have to buy more.'"
Japanese trading house Sumitomo Corp. in September entered into discussions on procuring more LNG from Texas. A company operating a processing facility in the state plans to turn out about 2 million tons of LNG per year for Sumitomo, over a 20-year period starting in 2023. The plan is to use a new plant currently under construction.
The shale gas revolution turned the U.S. into a natural gas exporter, but the trade war is seen as a threat to the industry's competitiveness.
© Reuters
Earlier, in July, Trump met with European Commission President Jean-Claude Juncker and agreed to start negotiations on boosting exports of U.S. LNG to the European Union. Then, in September, German Economy Minister Peter Altmaier announced that the site for a new LNG import terminal would be decided by the end of the year as "a gesture to our American friends."
The upshot? As more countries gain ground as gas suppliers and emerging economies become bigger consumers, the energy market of tomorrow may look nothing like it did yesterday.
"The impact on the value might be limited for now," said Dave Ernsberger of S&P Global Platts. "But there is the potential to completely re-engineer the flow of the world because of this trade war."
U.S. Energy Secretary Rick Perry met his Russian counterpart, Alexander Novak, last month and told him that while competition is welcome, Moscow can no longer use energy as a weapon because the U.S. is now positioned as an alternative supplier to Europe and Asia.
But energy is never far removed from geopolitics. According to Reuters and other media, China completely stopped importing crude oil from the U.S. in September. And as the trade war rages, natural gas, too, is becoming a more prominent form of diplomatic ammunition.
Shunsuke Tabeta in Beijing contributed to this article.
