No upside: The US LNG buildout faces price resistance from China

An unprecedented global market crisis has thrown the U.S. liquefied natural gas (LNG) industry into disarray. Falling global gas demand, collapsing international gas prices, and a mounting gas supply glut in both Europe and Asia have triggered a wave of canceled U.S. LNG shipments that will leave the nation’s liquefaction fleet operating at well under half capacity for the rest of the summer. Meanwhile, the massive buildout of the U.S. LNG industry has stalled out, as new buyers sit on the sidelines, avoiding signing new long-term supply contracts that would give proposed LNG projects the financial guarantees needed to move forward.

Despite the gloom over the U.S. LNG industry, some companies remain hopeful for a market rebound led by China— which, until recently, was the world’s fastest growing LNG consumer. But an analysis of China’s natural gas industry reveals an unwelcome reality for U.S. exporters: A China-led rebound for the U.S. LNG industry will face stiff price resistance from Chinese buyers.

A China-led rebound for the U.S. LNG industry will face stiff price resistance from Chinese buyers.

The finances of PetroChina, the Asian nation’s largest state-owned natural gas company and its top gas importer, reveal the company realized substantial losses from gas imports every year from 2015 through 2019. To justify expansion of imports, China would likely need to secure long-term LNG supplies at prices well under $7/MMBtu. Those prices would leave U.S. LNG exports out of the money in many market conditions and would certainly limit any upside profits for U.S. exports. Low citygate gas prices in China similarly limit the profitability of U.S. LNG exports to China. These forces—along with other structural and infrastructure constraints in China and globally—will create substantial headwinds for a China-led resurgence for the U.S. LNG industry.

Moving forward, U.S. LNG developers would be wise to pay close attention to the cost and price pressures that bedevil Asian gas markets. Bullish demand projections for LNG demand in China and Southeast Asia tend to ignore the price sensitivity of these markets, as well as the many logistical, economic, and political obstacles to the development of LNG and gas infrastructure. The most optimistic LNG demand scenarios are simply unrecognizable to experienced analysts of the Chinese energy sector. A sober and realistic assessment of Asian gas markets will be essential to prevent further overbuild of U.S. LNG facilities.