Energy traders were on alert when Reuters reported last week that Chinese energy giant, PetroChina – the world’s first company to hit (and lose) a $1 trillion market cap long before Apple – was in advanced discussions with Qatar to purchase liquefied natural gas (LNG) under short- and long-term agreements. The superficial explanation was that China needed to secure generous amount of LNG to supply its push to replace coal with cleaner burning natural gas to reduce air pollution. And sure enough, after Beijing started the program last year, China had overtaken South Korea as the world’s second-biggest buyer of LNG.
The deal also made sense from the perspective of the “blockaded” Qatar, the world’s biggest LNG producer, as the isolated Middle Eastern country sought buyers for a planned output expansion.
As it turns out there was another reason for the PetroChina supply diversification: PetroChina may temporarily halt purchases of spot U.S. liquefied natural gas spot cargoes through the winter to avoid potential tariffs as a result of the trade war between the U.S. and China, Bloomberg reported on Sunday according to sources with knowledge of the strategy.
Under the plan, PetroChina would boost buying of spot cargoes from other countries or swap U.S. shipments with other nations in East Asia to avoid paying additional tariffs, said the people, who asked not to be identified because the information isn’t public. PetroChina, a unit of the state-owned China National Petroleum Corp., couldn’t immediately comment when contacted by Bloomberg.
In retaliation to the latest round of tariffs imposed on China by the US, Beijing responded that it was considering a 25% tariff on U.S. LNG, which had been missing from previously targeted goods, direct hitting American gas exporters.
The move comes ahead of the winter heating season when demand and prices typically peak and shows two things: i) that Xi Jinping may be willing to suffer some pain to avoid backing down from U.S. President Donald Trump’s trade dispute, and ii) China is planning on lasting out the trade war for the long haul, suggesting that a near-term solution looks unlikely.
“If the tariff is implemented before winter, it would potentially increase the competition for non U.S. supply to the Asian market and hence drive up spot prices in Asia this winter,” Maggie Kuang, an analyst with Bloomberg NEF in Singapore said in an email. “Australia, Qatar, and Southeast Asia will most likely benefit.”
Meanwhile, US LNG exporters such as Cheniere would be hit hardest as a result of the import halt. PetroChina in February signed a 25-year deal to buy LNG from Cheniere Energy with a portion of that supply expected to start this year. That said, while China is currently the third-largest buyer of LNG, American cargoes only made up about 5.7% of its imports over the last year, according to Sanford C. Bernstein.
China may may have a more strategic view: yesterday Iran announced that another state-owned Chinese giant, China National Petroleum Corp (CNPC) had taken over the share of France major Total in the development of the giant South Pars oil field, giving the Chinese company an 80.1% stake in the project.
Clearly unconcerned about the threat of US sanctions, and taking advantage of the ongoing chaos in the middle east, China – which recently launched its own petroleum futures contract which many say is the first step toward internationalizing the PetroYuan – is aggressively ramping up its influence in the Gulf with the intention of becoming a dominant force in the regional energy market.
Meanwhile, Russia is making no secret of its intention to dedollarize its oil industry, with the unstated purpose of shifting toward the Petroyuan axis.
As we reported earlier today, speaking in an interview for the Rossiya 1 TV channel, Russia’s Finance Minister Anton Siluanov said that Russia “aims to keep reducing its investments in American securities” following new U.S. sanctions and said that the “US dollar is becoming an unreliable tool for payments in international trade.” The minister also hinted at the possibility of using national currencies instead of the dollar in oil trade.
“I do not rule it out. We have significantly reduced our investment in US assets. In fact, the dollar, which is considered to be the international currency, becomes a risky tool for payments,” Siluanov noted.
And with Russia hinting that it is close to giving up on the dollar entirely in oil trade and shifting to a petroyuan-based regime, how long before other nations follow suit, especially as China no longer shows any qualsm when it comes to severing existing US energy ties – whether in retaliation to trade war or otherwise – and pursuing alternative sources of production?