China opted to not include US LNG on its list of products from the United States that will face hefty import duties beginning on Friday, but Beijing may use LNG sales later should the trade war between the two economic superpowers escalate. EnergyResources photo.

US LNG sales could hit $9 billion within two to three years

US LNG has not been included in the list of products that face hefty Chinese import duties beginning on Friday the trade war between Washington and Beijing intensifies.

While some experts see the omission as China holding on to a potential weapon in the trade dispute, it is also believed that Beijing is trying to ensure a steady supply of natural gas as millions of Chinese households switch from coal to cleaner burning natural gas.

On Friday, China will impose tariffs on $34 billion of US goods, including pork, soybeans and cotton in retaliation for the Trump administration’s 25 per cent tariffs on steel and 10 per cent tariffs on aluminum.

“If the (trade) war escalates, (I expect) the government will not hesitate to add LNG,” a state oil and gas company executive told Reuters.  The source declined to be identified due to the sensitivity of the issue.

In 2017, US LNG exports to China amounted to $1 billion.  Morgan Stanley estimates that annual Chinese imports of LNG from the US could hit $9 billion in two to three years.

This amount could be even higher if the US can resolve a logistics bottleneck.

The increased purchases of US LNG could help offset China’s trade surplus with the United States.  But Beijing may use US LNG exports as a weapon in the trade war should the situation escalate.

However, as there are a limited number of alternative suppliers to accommodate China’s needs, some industry sources say Beijing would feel the impact should tariffs be placed on LNG imports.

“If we impose tariffs on US LNG, we pay a much higher opportunity cost,” Mei Xinyu, a researcher at a think tank affiliated with the Commerce Ministry told Reuters.

“It is easier for China to switch into other suppliers in the soybean market. Duties on soybeans hurt the U.S. more, but duties on energy products would hurt both sides.”

Last year, the Chinese government met with the country’s three oil and gas majors where the companies underlined that China would have limited alternatives to US LNG.

“The conclusion at that time was that US oil is not competitive,” an official with one of the oil companies told Reuters. “In the gas market, we don’t have much choice, mainly Qatar, Australia and the U.S.”

Last winter, China faced a gas supply shortage when cold temperatures forced citizens to turn up the heat at a time when the government was trying to shift away from coal use.

And China’s National Development and Reform Commission showed domestic natural gas use jumped by 17.6 per cent in the first five months of 2016.  The agency had predicted a growth rate of 7 or 8 per cent.

“With domestic gas production restrained, we need to expand imports to meet the target of having natural gas account for a 10-per cent share of the energy consumption basket,” Wang Haohao, gas analyst with Zibo Longzhong Information Group told Reuters.

“We need US LNG out of energy security considerations,” she added.