US LNG Firms Lament Bad Timing of Tariffs, China Trade Spat

The Trump administration's planned steel tariffs and a potential trade battle with China could hurt U.S. liquefied natural gas companies just as a new wave of developments in the fast-growing market is gaining steam, company executives say.

China is the fastest growing major buyer of LNG, making it an important customer for U.S. producers. It is also a significant exporter of the steel components used in LNG plant construction.

With an LNG shortage looming as early as 2022, a rush of offtake deals with China and other buyers had been looking likely, boosting construction prospects, said company executives at the CWC LNG Americas Summit in Houston.

But the proposed steel tariffs, which will increase project costs and impact deal pricing, could make U.S. projects less attractive than international rivals.

"I think imposing steel tariffs at this juncture in the evolution of the second wave, right as we move into this very critical stage of the commercial process - locking in customer commitments - is a bad idea," said Patrick Hughes, vice president of corporate strategy with LNG developer NextDecade Corp.

Hughes said the prospect of backlash from steel-producing customer countries was "not insignificant," adding to the risks around increased costs.

U.S. President Donald Trump amped up his trade battle with China on Thursday, announcing possible new tariffs targeting the country's high-technology sector, following on from his decision to set general import tariffs of 25 percent on steel. China has already threatened to retaliate by hitting U.S. agricultural exports.

China is the world's No.2 LNG importer. It also exports many of the specialized steel components needed in LNG plants, products that are not made in the United States.

"I would say the overwhelming majority of steel in an LNG plant is pretty specialized," said Anatol Feygin, Cheniere Energy Inc's chief commercial officer, adding: "Presumably things that cannot be sourced in the U.S. will not be subject to those (tariffs)."

The U.S. Department of Commerce has said there will be an exclusion process for steel products not made domestically, but many details are still unknown.

Cheniere signed two major sales deals this year before the tariffs were announced, including one with China, fully commercializing the third liquefaction unit at its Corpus Christi project in Texas.

The company is now finalizing financing, which will take six to eight weeks, the final step before it can formally greenlight the 4.5 million tonne per annum project, said Feygin. It will be the first new LNG build to go ahead in the U.S. since 2016.

That had emboldened many would-be U.S. producers, who were optimistic of their prospects of joining Cheniere in a second wave of development, with the potential to vault the United States ahead of Qatar and Australia to become the world's top producer.

The tariffs are not expected to meaningfully impact expansion projects planned by Cheniere and other first wave producers, but new entrants who need to build steel intensive infrastructure could now face harsher headwinds.

Energy executives told Reuters earlier this month that the steel and aluminum tariffs could increase the cost of big-ticket shale and LNG projects by as much as 10 percent.

More China-targeted tariffs would also slow deal-making between U.S. producers and Chinese buyers, just as a new buying window had opened, said Charlie Riedl, Executive Director for the Center for Liquefied Natural Gas.

"The industry is really close to laying the golden egg and this could potentially - kill it is probably too far - but it could be a real setback for the second wave of projects," he said.