On the face of it, the Phase One trade deal signed between the US and China looks set to provide a big boost to American oil and gas producers who need to develop new export markets. Just how well they fare against exporters who are much closer to the world’s biggest energy importer may depend as much on economics as on politics.
The energy trade section of the deal commits China to increasing its purchases of American energy products — crude oil, refined products, liquefied natural gas and coal — from levels seen in 2017, a high-point for US exporters before the trade war began to hamper bilateral relationships. The countries agreed that shipments should increase from the 2017 level by no less than $18.5 billion this year and be at least $33.9 billion above the same baseline in 2021.
Need for new markets pronto
US producers need to develop new export markets to soak up production that is still growing faster than domestic energy needs. That over-supply is capping domestic crude and natural gas prices and hurting their bottom-lines.
Back in the baseline year of 2017, before China retaliated to the first wave of US tariffs on its exports, American exporters shipped $9 billion worth of energy-related products to China, according to the International Trade Commission. Crude oil exports reached 78.7 million barrels, according to the commission, or 81.8 million barrels, according to data from the Energy Information Administration.
According to the EIA, crude accounted for half of all US oil exports to China in 2017, while natural gas liquids (ethane and butane) — key components of much of the production from US shale plays — accounted for another third.
Exports of natural gas to China also jumped to $2.5 billion in 2017, driven in part by increased export capacity at Cheniere’s Sabine Pass liquefaction terminal in Louisiana, according to the trade commission, but that was still only a small fraction of total liquefied natural gas by US producers. The IEA puts 2017 LNG shipments to China at 103 billion cubic feet, or 15 per cent of total exports from the US. (The volume fell in both 2018 and 2019.)
So that means the deal should result in a huge jump in US oil and gas export to China. If the entire increase were to be in the form of crude, the industry could expect an additional 770,000 barrels a day of exports in 2020 and 1.4 million barrels a day in 2021, based on a WTI price of $60 a barrel and shipment cost of $5.50.
No easy job
But, US exporters may not have an easy job in prizing open the Chinese market for US energy products, especially if Chinese import tariffs of 5 per cent for American crude oil and 25 per cent for LNG and propane remain in effect.
Gas exporters may find it particularly difficult. China imported 121 billion cubic meters (4.29 trillion cubic feet) of natural gas in 2018, according to the BP Statistical Review of World Energy, with about 60 per cent of the total in the form of LNG and the rest delivered by pipeline from countries in Central Asia. China’s biggest LNG suppliers — Australia, Malaysia and Indonesia — are all much closer than the US, which gives them significant shipping-cost advantages. US natural gas feedstock prices will have to stay low enough to offset that shipping disadvantage.
Watch out for Siberia
The list of other potential hurdles is long. There will be greater competition from pipeline supplies with the start-up of the Power of Siberia link from Russia’s East Siberia, which will deliver at least 5 billion cubic meters of Russian gas this year. That volume will double in 2021 and eventually rise to as much as 38 billion cubic meters per year.
And all gas suppliers will face the challenges of weaker Chinese demand growth as the country faces economic headwinds and a plethora of competitive supply options, according to consultancy group Wood Mackenzie. China’s own gas production is projected to rise by 9 per cent this year.
In the oil sector, US suppliers met just 3 per cent of China’s crude oil import requirements in 2018, giving them plenty of room for growth. US grades are unlikely to supplant flows from the Middle East, which are typically heavy and sour (containing high concentrations of sulphur that have to be removed).
Russian crude is similar, as is much of the oil imported from Central and South America. Their easiest targets may be producers in West Africa and the North Sea, which pump crudes that are more like US grades than those from China’s other big suppliers. But even here US producers are at a disadvantage in terms of distance and thus transport costs.
One area where US producers may face fewer obstacles is in the natural gas liquids that form the basis of most petrochemical processes. Plastics are seen as a key growth area for oil demand in medium-term forecasts and China vies with the US for the top spot in the International Energy Agency’s list of incremental feedstock use.
Producers of very light, sweet (low-sulfur) crude and natural gas liquids from the US shale formations face far fewer competitors for their shipments and it may be them, rather than the exporters of more conventional US crude grades, who are the real energy winners from the Phase One trade deal.