From The Wall Street Journal
Cheniere Energy Inc.’s expected $18 billion deal to supply natural gas to China signals the company’s growing bet on the country, and China’s emergence as a top market for U.S. gas exporters.
In a move that would be announced as part of a broader U.S.-China trade deal, China’s state-owned China Petroleum & Chemical Corp., known as Sinopec, will agree to a long-term contract to buy about $18 billion of liquefied natural gas from Cheniere, The Wall Street Journal reported Sunday.
The deal would be the third long-term supply agreement Cheniere has signed in the country, and a sign that China figures prominently in its future plans.
Cheniere signed the first-ever long-term supply contracts to China in February of last year, agreeing to send 1.2 million tons of LNG a year to China National Petroleum Corp. through 2043. Eyeing further expansion in the country, Cheniere opened an office in Beijing in 2017.
“China is an important growth market for Cheniere, and we continue to build and solidify relationships with key Chinese counterparties as we expect to sell meaningful amounts of LNG into China over the long term,” Cheniere Chief Executive Jack Fusco said on a call with investors in August.
China is the fastest-growing importer of LNG, as it seeks to move to cleaner fuels and heat homes in the northern part of the country with natural gas. After importing less than 10 million tons of LNG in 2010, China’s imports are expected to grow to 88 million tons a year by 2025, according to a report by Macquarie Group Ltd.
But Cheniere’s bet on China hasn’t been without risk. China hit U.S. LNG with 10% tariffs as part of a trade fight, and it has been buying the product mainly from U.S. competitors—Qatar, Australia and Malaysia.
Cheniere’s contract with CNPC is still in place, but the state-owned company has had to swap much of the U.S. volumes for supplies from other countries such as Australian LNG to be shipped to China, helping avoid the Chinese tariff on LNG originating in the U.S.
The tariffs also have held up Cheniere’s negotiations with other potential customers in China, and the company believes its deal with Sinopec would have been signed months ago if not for the trade spat, say people familiar with the negotiations.
Those risks haven’t deterred Cheniere. As part of the expected deal with Sinopec, Cheniere could take financing from Chinese state banks, say people familiar with the matter, a sign the company is willing to deepen ties there.
The deal with Sinopec is expected to help greenlight Cheniere’s sixth LNG train, a compressor that converts natural gas into a liquid, at its plant at Sabine Pass, La. Trains typically cost about $3 billion to construct, according to analysts, and Cheniere could use Chinese financing to fund some of that project. The company has previously financed a train with an equal portion of debt and equity.
Despite the risk, China’s rapid demand growth makes it too big of a market for U.S. LNG exporters to ignore.
“All LNG contracts are signed with an eye towards China,” said Katie Bays, an analyst at Height Capital Markets. “China is a unique and very important player in the LNG market.”
There are currently just three operational terminals in the U.S. to export LNG: Dominion Energy Inc.’s Cove Point in Maryland and Cheniere Energy LNG Inc.’s two plants in Louisiana and Texas. There are about 25 proposed U.S. LNG export projects, and many will need Chinese demand to justify moving forward with projects, say analysts.
Sempra Energy , whose Louisiana LNG facility will start up this year, has said it sees China as an important market for the U.S. despite the tariffs.
“[W]hat I’m a little bit confident about is LNG is an important part of China’s future,” Chief Executive Jeffrey Martin said on a call with investors in August. “And frankly, the United States will always be one of the lowest-cost suppliers. And we think this bodes well for the future.”
