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The energy world is only starting to comprehend the many ways in which war in Ukraine is disrupting markets. Europe’s push to replace Russian pipeline gas with liquefied natural gas (LNG) promises to recast dynamics between major LNG exporters and importers – and geopolitical relations between global superpowers.

Photo: Cheniere. Montage by *Energy Flux*

Before Russia invaded Ukraine, the prevailing geopolitical narrative underpinning LNG trade was one of cooperation between adversaries. The emergence of the US and China as the world’s biggest exporter and importer, respectively, bolstered the diplomatic significance of US LNG exports.

The US was the world’s third-biggest LNG exporter in 2021 at almost 75 million tonnes, shortly behind Qatar and Australia. The commissioning of new liquefaction trains (the equipment to chill natural gas into LNG) at Sabine Pass and Calcasieu Pass in Louisiana this year will push US export capacity beyond those two countries and into the global top spot.

At the other end of the value chain, China increased its LNG imports by 12 million tonnes to 79 million tonnes in 2021, nosing ahead of import-reliant Japan for the first time. This 18% surge in LNG imports coincided with China’s economic rebound: GDP grew at 8.1%, its fastest in ten years and well in excess of Beijing’s 6% target. The Chinese economy is today valued at 114.37 trillion yuan ($17.97 trillion). Only the US economy is larger, at $23 trillion.

The dominance of the US and China at either ends of the LNG trade spectrum created a geostrategic rationale for cooperation between these two feuding superpowers. LNG became a rare point of bilateral cooperation in 2021, with Chinese buyers signing a flurry of long-term sales and purchase agreements (SPAs) with US exporters.

China signed 14 SPAs last year for a total of more than 20 million tonnes, locking in future supplies beyond 2030. Those contractual volumes will be in addition to China’s burgeoning spot purchases of LNG, which accounted for around 45% of China’s entire LNG procurement in 2021. This is significantly above the global average of around 31%, according to Shell’s 2022 LNG Outlook.

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US LNG’s great expectations

The value of US LNG trade with China slumped in 2019 after the Trump administration launched a trade war with China and Beijing retaliated with import tariffs. Europe was the big beneficiary that year, with US LNG imports spiking almost fivefold.

Since then, the US has managed to cater to booming gas demand in both Europe and China. US LNG exports to Europe breached 1.2 trillion cubic feet – equivalent to 34.2 billion cubic metres (Bcm) – for the first time in 2021, with a nominal trade value of €8.8 billion, according to the US Energy Information Administration. Chinese imports of US gas were less than half that, at 450 billion cubic feet, worth an estimated $3.3 billion.

Data from EIA. Chart by *Energy Flux* (click to enlarge)

There was an expectation that Chinese purchases of US LNG would play a big role in rebalancing the enormous US-China trade deficit. A Phase 1 trade deal signed between the two superpowers in early 2020 envisaged China buying $52.4 billion of US energy products over 2020 and 2021.

That figure is on top of trade in 2017, the year before tariffs were first imposed by the Trump administration. In the end, Chinese energy purchases met only around half of that commitment, despite the uptick in US LNG imports. The US-China trade deficit even rose to $355 billion in 2021, its highest level since 2018.

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Rhetoric-reality gap

With US LNG exports running up against infrastructure capacity constraints, Europe’s wartime scramble for LNG implies constrained growth in exports to China and other regions. However, there is much uncertainty over how this might play out because political statements emanating from the EU are yet to translate into commercial agreements.

Essentially, there is a disconnect between political intent and commercial reality. On a rhetorical level, the US is signalling unwavering support for EU efforts to rapidly curb Russian gas imports by sending ever greater volumes of LNG to Europe. Yet not a single new binding supply deal has yet been signed between US LNG exporters and European gas buyers since last month’s signing of a high-level US-EU Task Force for Energy Security that is ostensibly geared towards sending more cargoes to Europe.

China, not Europe, is striking new deals with US gas exporters. Chinese independent energy company ENN last month signed two 20-year SPAs with Energy Transfer covering 2.7 million tonnes per annum from the Lake Charles LNG export project in Louisiana. This came hot on the heels of a binding preliminary deal between NextDecade Corporation and Guangdong Energy Group for up to 1.5 million tonnes per annum over 20 years from the Rio Grande LNG project in Texas.

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Doing business in wartime

The vaguely-worded US-EU task force envisages sending an extra 15 Bcm of US LNG to Europe this year, followed by an extra 50 Bcm per year “until at least 2030”. To make this happen, the European Commission promised to “support long-term contracting mechanisms” to support final investment decisions on new US LNG export capacity, because banks won’t lend to projects in the absence of revenue certainty.

There are myriad reasons why rhetorical support won’t necessarily translate into new long-term contracts, however. The task force itself is geared towards reducing overall European gas demand, which seems at odds with a push to guarantee European demand for new US LNG projects, while the urgent backdrop for negotiations means US LNG sellers will drive a hard bargain on price and other contractual terms.

Negotiations must strike common ground on price and volume risk. The task force calls for new contracts to “include consideration of Henry Hub Natural Gas Spot Price”, which implies EU gas buyers taking on a degree of price risk for ten, 15 or 20 years in the notoriously volatile and cyclical LNG market.

Furthermore, if strong buying appetite persists, then EU gas buyers will be forced to lock in less competitively priced LNG volumes from less economic projects that in benign market conditions might not get built. If the private sector cannot stomach this, the EU could bridge the divide by socialising risks with some form of subsidy to get SPAs signed.

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The politics of dealmaking

If EU gas buyers overcome these challenges and underwrite a new wave of US LNG export capacity, this diminishes China’s share of the US’s growing shale gas exports. So far, the opposite seems to be happening: the EU is blowing hot and cold on the long-term role of gas and LNG in the European energy mix, while China is getting down to business and striking new deals that will secure supplies of the coveted fuel for the coming decades.

If the status quo prevails, LNG could be the only bright spot amid otherwise deteriorating trade relations between Washington and Beijing. The US is signalling it is prepared to get tough with China and adopt a new approach to its yawning trade deficit. There is open speculation this could trigger a fresh round of tit-for-tat tariffs on US and Chinese goods and services – particularly if Washington perceives Beijing to be tacitly helping Russia evade sanctions.

If that happens and China’s imports of US LNG again collapse, this could recast negotiations between the US and Europe and perhaps open a window of opportunity for EU gas buyers to sign US LNG SPAs on less onerous terms. If not, China’s thirst for gas could ensure US LNG keeps flowing east. Either way, it is a seller’s market for LNG and any new supply contracts will reflect that asymmetry – regardless of the rhetoric that accompanies the dealmaking.