Oil & Gas

The US-China Trade Deal

Bringing Benefits to Oil and Gas Producers

In an increasingly globalized world, economic supremacy is crucial in establishing the poles of power and influence. The great powers have not hidden their intentions lately, openly acknowledging the struggle from a technological, scientific and research point of view, but especially in relation to natural resources. The recent deal between the US and China, sealed in early 2020, seems to be a truce between the world’s largest economies. But how long will it hold?

The United States of America and China in mid-January signed a first trade deal, which envisages the elimination of certain tariffs and the increase of Chinese purchases of US goods and services, easing the conflict over the past 18 months between the world’s two largest economies. Beijing and Washington officials have described the first phase of the trade deal as an important step after months of punctuated negotiations with retaliatory tariffs that disrupted supply chains and caused fears of slowing global growth.

“Together, we are righting the wrongs of the past and delivering a future of economic justice and security for American workers, farmers, and families,” said US President Donald Trump at the White House, together with China’s Deputy Prime Minister Liu He and other officials.

 

China will buy additional energy supplies of USD 50 billion

The basis of the deal is China’s commitment to purchase US goods, services and agricultural products worth at least USD 200 billion, in the following two years, compared to purchases of USD 186 billion in 2017. The deal will include additional orders for USD 50 billion in agricultural products, Trump said, adding that China will buy additional US services worth USD 40-50 billion, manufactured goods of USD 75 billion and additional energy supplies of USD 50 billion.

Officials from both countries said the agreement marks a new era for the Sino-American relations, but it fails to respond to many of the structural differences that have prompted President Trump to trigger the trade war. These issues include China’s old practice of subsidizing state-owned companies and flooding international markets with very cheap products. White House Economic Advisor Larry Kudlow said the deal would add 0.5 percentage points to the growth of the US economy in 2020 and 2021.

However, some analysts have expressed skepticism that the deal will put US-China trade relations on a new path. The first phase of the trade agreement, agreed in December, cancels the planned US tariffs for phones, toys and laptops and halves to 7.5% the tariffs for Chinese goods of about USD 120 billion, including TVs, Bluetooth headsets and footwear. The tariffs of 25% on Chinese industrial products and components of USD 250 billion used by US manufacturers will remain in effect.

 

Boost for US oil and gas producers

The Phase 1 trade agreement signed between the US and China will provide a major boost to US oil and gas producers who need to develop new export markets. The energy trade section of the agreement commits China to increase its purchases of US energy products – crude oil, refined products, liquefied natural gas and coal.

The year 2017 was an important milestone for US exporters before the trade war that subsequently hampered the bilateral relations between the two super powers. Both the US and China agreed that deliveries should increase compared to the reference point of 2017 by USD 18.5 billion in 2020.

US producers must develop new export markets to absorb the production that continues to grow faster than the domestic energy needs, in conditions in which oversupply limits the domestic gas prices.

In 2017, before the Chinese state fought back against the first wave of US tariffs applied to its exports, US producers had shipped to China energy products worth USD 9 billion, according to the International Trade Commission. On the other hand, crude oil exports reached 78.7 million barrels, the Trade Commission also informs.

According to EIA (U.S. Energy Information Administration), crude oil accounted for half of total US oil exports to China in 2017, while natural gas liquids (ethane and butane) accounted for another third.

 

Decline of oil trade

US oil shipments to China peaked in 2017 at around 450,000 barrels per day, of which half was crude oil and one third liquid natural gas. Natural gas exports to China increased to USD 2.5 billion in 2017, an increase largely determined by the increased export capacity of the Sabine Pass liquefaction terminal of Cheniere. The EIA places 2017 LNG deliveries to China at 103 billion cubic meters, accounting for 15% of total US exports, and the volume decreased in both 2018 and 2019.

Even before the start of the trade war, China was not a large market for US liquefied natural gas, which should now lead to a significant increase in US oil and gas exports to China. If the whole growth were in the form of crude, the industry could expect an additional 770,000 barrels per day for export in 2020 and 1.4 million barrels per day in 2021, based on a WTI price of USD 60 per barrel and the cost of transportation of USD 5.5. However, US exporters may not have an easy life in appreciating the opening of the Chinese market for US energy products, especially if the tariffs of 5% for US oil and 25% for LNG and propane remain in effect.

Gas exports could be particularly difficult, given that China imported 121 billion cubic meters of natural gas in 2018, according to BP Statistical Review of World Energy, about 60% of the total in the form of LNG, and the rest delivered through pipelines to Central Asia. China’s largest LNG suppliers – Australia, Qatar, Malaysia and Indonesia – are much closer to China from a geographical point of view than the US, which gives them significant advantages in terms of transportation costs. US gas supply prices should remain low enough to offset the disadvantage of transportation.

We cannot ignore the fact that there is also a great competition from Russia, which will deliver to China, through the Power of Siberia pipeline, 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 gas production is expected to grow by 9% this year.

 

US suppliers have penetrated the Chinese market with 3%

In the oil sector, US suppliers met just 3 per cent of China’s crude oil import requirements in 2018. US suppliers 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. China’s 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.

The first phase of the Trade Agreement was sealed, but, as I said at the beginning, it is to be seen how long there will be peace in the increasingly ‘mined’ realm of the global economy.

Daniel Lazar

Journalist

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