Trade war could make our lead in natural gas evaporate

Trade war could make our lead in natural gas evaporate
© Getty Images

Natural gas and liquefied natural gas (LNG) have never been more paramount to the U.S. Not only do U.S. LNG exports create jobs and contribute to a lower trade deficit, they also reinforce U.S. global leadership and competitiveness.

As the trade war with China heats up and retaliatory strikes hit our energy exports, the U.S. risks losing market share. Saudi Arabia’s recent decision to buy U.S. LNG will not make up for potential losses from China choosing to shop elsewhere.  

One of President TrumpDonald John TrumpMichael Flynn transcripts reveal plenty except crime or collusion 50 people arrested in Minneapolis as hundreds more National Guard troops deployed Missouri state lawmaker sparks backlash by tweeting 'looters deserve to be shot' MORE’s earliest mantras was U.S. energy dominance. In fact, the U.S. achieved record-breaking growth in 2018 and became a net gas exporter for the first time in 60 years. But risks to exports loom. 

ADVERTISEMENT

China announced its plan to raise tariffs on U.S. LNG to 25 percent from 10 percent in response to Trump’s recent tariff hikes, and the negative impact was immediate.

U.S. LNG shipments to China plummeted when the original 10-percent tariff was imposed, and in the past six months, only four cargoes were delivered to China. Over the same period a year ago, that number was 35. 

As the world’s second-largest LNG importer after Japan, China holds significant power when it comes to LNG. Most of the proposed LNG export projects from U.S. energy firms are underpinned by long-term contracts with China.

Without Chinese participation and growing demand for U.S. product, all the proposed U.S. LNG export projects are at risk. 

China’s reluctance to import U.S. LNG also boosts the market potential for overseas competitors like Qatar and Australia, putting them ahead of the U.S. in development of LNG export projects. This undermines the long-term competitiveness of U.S. LNG projects. 

Importantly, the consequences of this trade war will reach beyond the U.S. energy industry and possibly even reshape the U.S.-led global order. The absence of U.S. LNG could incentivize China to push its Belt & Road Initiative (BRI) further in order to fill the gap that U.S. LNG left.

ADVERTISEMENT

To that end, China has invested $27.1 billion so far in energy infrastructures, including LNG projects and pipelines in the Indo-Pacific and Eurasia regions.

The hope is that these recipient countries will become partners who will provide more stable and reliable energy resources with easier access, and China’s investments in markets outside the U.S. will increase further. 

What is even more concerning is that the BRI is motivated by geopolitical imperialism, not economic partnership. Part of China’s BRI model is to offer countries a debt-to-equity swap deal, increasing China’s ownership of critical energy infrastructures in the region and expanding influence. As a result, the momentum of the BRI will bolster China’s pursuit of global leadership.

The rising trade tensions could also further strengthen Sino-Russia alliances. To replace U.S. LNG, China will increasingly depend on Russia’s gas pipelines. Notably, the Power of Siberia pipeline, expected to come online in 2019, can capture almost 15 percent of China’s natural gas import demands.

China has also actively invested in Russia’s LNG projects, such as Yamal LNG and Arctic LNG 2. With this robust energy cooperation, the two will be able to enhance mutual interest to counter the U.S. 

As the trade war forces U.S. LNG to find destinations other than China, Russia is turning its attention to energy-hungry countries in the Asia Pacific — specifically Japan and South Korea, both close U.S. allies.

With the gradual retreat of the U.S. from the region, U.S. allies are increasing ties with Russia for energy. South Korea is already in talks with Russia about the potential gas pipeline via North Korea, while Japan is looking to boost its LNG imports from Russia.

Russia has already been increasing its presence in the region. With Russia’s stable support, along with its BRI partners, China can more confidently step up as a superpower that rivals the U.S., which could signal the end of U.S. hegemony. 

The global trade war is at an impasse and like a prisoner’s dilemma, it is difficult to know which side is going to give in to get more, or if the economic damage will deepen due to lack of cooperation.

Nevertheless, U.S. LNG is still attractive to Chinese buyers, and China wants to continue to benefit from affordable U.S. LNG that can be shipped with no destination restriction. The U.S. has recently realized an energy renaissance in oil and gas few could have imagined just 10 year ago.

To slow progress and stifle growth because of a tariff war is a bad deal for the U.S.

Carolyn Kissane serves as the academic director of the graduate program in global affairs at the Center for Global Affairs at New York University and is a clinical professor teaching graduate level courses examining the geopolitics of energy, comparative energy politics, energy, environment and resource security.

Christine Woori Ahn, an LNG consultant, contributed to this piece.