Whether intended or not, the potential of rising US LNG exports is proving to be a great bargaining chip for Donald Trump as he deals with the fallout from his threatened trade tariffs and sanctions
The joke, when Donald Trump was elected as the 45th US president in November 2016, was that he didn’t know what LNG was. “LNG?” he asked his aides. “What’s LNG?”
Well, Mr Trump has learned a lot about LNG in the intervening 18 months. He knows now that LNG is helping to monetise his country’s rich shale gas resources and reduce the US trade deficit through overseas sales. He also appreciates that rising US LNG output is strengthening his hand as he competes with his traditional rivals for geopolitical influence and a greater share of the global energy market.
Yet, it is difficult to assess whether the president’s shoot-from-the-hip style of diplomacy, with threats, real and otherwise, of tariffs, trade wars and sanctions, is reinforced by any underlying strategy. Does he appreciate, for example, what kind of effect his pronouncements are going to have on the fortunes of those investing in the large new US LNG export plants?
It says something for the inherent strength of the current LNG market that the prospects for US exporters still seem undimmed, despite the latest round of what appear to be impromptu decisions emanating from the White House. Indeed, US LNG exports are emerging as a key bargaining chip for Mr Trump as the initial shock of his declared trade war with China dies away and the two sides get down to the more mundane work of negotiating their way out of the impasse.
LNG bandwagon already rolling
When Donald Trump was elected, the US was already well down to road to becoming a global player in the LNG sector. Sabine Pass Train 1, the first worldscale liquefaction unit in the US, had commenced exporting LNG cargoes from its Louisiana terminal in February 2016.
Furthermore, final investment decisions (FIDs) had also been taken for five additional US export projects. By 2021, when these and all five Sabine Pass trains are operational, the US will have the capacity to dispatch 65 mta of LNG to world markets.
The potential output from the six export plants will be equivalent to about 13% of the country’s expected gas production that year. The aggregate liquefaction capacity will position the US as the world’s third largest LNG export country, behind only Australia’s 85 mta and Qatar’s 77 mta.
That will not be the end of the US LNG push. For every US LNG project currently under construction, there are about three others at the planning stage. While not all of these ‘second-wave’ schemes will materialise, many believe that a build-up in the US LNG production capacity to at least the 100 mta level by 2025 is a very probable scenario.
As an indicator of the way the wind is blowing, in the past few days Cheniere Energy sanctioned the construction of a third 4.5 mta train at its Corpus Christi project in Texas. This is the first approval for new LNG production capacity anywhere in the world this year and the first FID for a US LNG liquefaction train since 2015.
Cheniere Energy is also the company behind the Sabine Pass terminal, where it is hoping to construct a sixth 4.5 mta train. Corpus Christi, too, is envisioned as a larger terminal. The masterplan calls for the provision of another 9.7 mta of liquefaction capacity beyond the three trains that have been given the OK, by means of either two additional large trains or seven mid-scale units of modular construction.
Europe as a pawn
The availability of growing volumes of US LNG is reassuring for gas users in Europe, especially those nations highly dependent on pipeline deliveries from Gazprom of Russia. Heightened tensions between Russia and the West in recent months have brought the issue of European gas supply security more sharply into focus.
To date relatively few Sabine Pass cargoes have made it to Europe, and Russian pipeline flows have continued uninterrupted. The strong Asian market, where LNG imports command a premium, remains the primary destination for the rising number of US export cargoes.
For its part, Russia would like to boost gas deliveries to Europe, including through the planned new Nord Stream 2 pipeline which would provide an additional flow bypassing Ukraine as a transit country. President Trump is set against the plan, pointing out to his European allies that US LNG will be able to offset any diminution in supplies caused by the absence of Nord Stream 2, providing a secure alternative supply to the region in the process.
The US threat of extending the latest regime of anti-Russia sanctions to companies supplying materials for Nord Stream 2 has been raised. In addition, the US administration has hinted it might be willing to relax any threatened tariff restrictions for those European trading partners willing to veto Nord Stream 2. For its part Gazprom is sticking to its line that its piped gas will remain cheaper for European consumers than US LNG, irrespective of any Ukraine transit fees that may arise.
In the meantime, European buyers continue to sign preliminary agreements for long-term gas supplies from the developers of second-wave US LNG projects that are continuing to press ahead with their initiatives. For example, Italy’s Edison and Galp of Portugal, along with BP and Shell, have signed up for an aggregate 6 mta of the output that Venture Global plans to make available at its new export terminal earmarked for Calcasieu Pass in Louisiana.
Asia trade balancer
President Trump believes the US is getting a raw deal in its general trade arrangements with the major Asian economies. Trade flows are imbalanced, with imports of goods from Asia far outweighing exports to the region, and the US administration points out that these imports enter the country with no surcharges and destroy American jobs.
Donald Trump has reacted to the situation by threatening steep tariffs on a range of Asian imports, implementing campaign promises to redress the trade balance and protect jobs in the process.
Asia’s top energy consumers – China, Japan, Korea and India – have been quick to respond to the US threat, suggesting in recent weeks that increased imports of US LNG would be one way to bring more balance to transpacific trade flows. The rapidly rising demand for LNG imports in countries like China and India feeds into this scenario.
The offers of increased purchases of US LNG have helped quieten nerves, prompting joint communiques on upcoming negotiations that will seek to develop workable solutions. These, in turn, have eased trade tensions and lifted stock markets in the US and Asia, not least the share prices of those companies bringing, and attempting to bring, new US liquefaction plants onstream.
The threat of a US trade war with the major Asian economies has done more than anything else in recent years to boost the prospects for FIDs on US second-wave LNG export projects.