China's retaliatory tariff on US LNG

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Following recent news on China implementing a 10% tariff on US LNG effective September 24th, please find a commentary from Giles Farrer, research director, Wood Mackenzie:

"In the 12 months up until June 2018, China was the second largest buyer of US LNG, accounting for approximately 3 mmtpa of US LNG, with Shell being the largest seller. However as the US-China trade dispute escalated, Chinese buyers have gradually reduced purchases of US LNG.

"The impact on the short term market is likely to be less than we previously indicated. This is partly because the level of the tariff is lower than initially proposed, 10% now vs 25% in August, but also because we think China has already completed the majority of its procurement for winter. Possibly because of this, we have recently seen spot and futures prices for winter come down despite strengthening oil prices.

"If China still needs to procure spot cargoes, we think that this is likely to result in a premium of up to 10% on supply from non US, lean sources like the Australia East Coast projects, Tangguh, Gorgon or the Qatari Mega-trains. Chinese buyers' appetite to pay significantly higher prices for LNG from other sources may be limited by the price they can sell gas domestically.

"For the long-term market, the consequences are likely to be felt on new supply developments. It restricts the target market for developers of new US LNG projects trying to sign new long-term contracts. However there is still plenty of appetite for second wave US LNG projects from other buyers in Asia and Europe, as evidenced by recent contracting momentum at Freeport, Calcasieu Pass and Sabine Pass Train 6. The first wave of US LNG projects were successful despite not signing contracts with Chinese buyers.

"It could also support development of other projects outside of the US targeting the Chinese market (including Russia pipeline projects), potentially allowing them to push for higher long-term contract prices. The recent deal between PetroChina and Qatar is evidence of this."