China Wants a Piece of US LNG Cinderella Story

on June 23, 2015 at 12:00 PM

An tanker is docked on June 05, 2010 off

One of three Chinese state-owned oil majors, Sinopec Group, is interested in investing in the US liquefied natural gas (LNG) sector. Jack Yu, managing director of Sinopec D.C., which handles government relations with the US, said last week that Sinopec wants to make minority investments in US shale oil and gas projects as China seeks to diversify its oil and gas supplies. He said that Sinopec is keen to take a 10-15 percent state in US LNG projects.

Though US oil prices have fallen to around half of what they were this time a year ago, Yu said that the valuation of US projects remain elevated, limiting opportunities for bargain hunting. “Not only do we want to be an LNG buyer, we also want to invest in projects and become shareholders,” the Sinopec senior official said.

“LNG contracts are for 20-25 years. If you miss the window to export to China, there will be no window for you,” he said. He added that “in the foreseeable future, we don’t expect China’s oil and gas production to increase significantly.” Yu’s analysis is correct. China’s largest oil fields have matured and production has peaked, while its shale gas plans are fraught with both technical and geological problems trying to access gas deposits in hard to reach and remote locations.

Reuters said that if new deals materialize, they would come more than two years after Sinopec made waves with two big US investments, spending more than $3 billion buying various shale stakes from Devon Energy and Chesapeake Energy. To date, however, US LNG projects (part of the US energy resurgence that should be dynamic long after US shale oil plays peak then start to decline around 2020 or shortly thereafter depending on which forecast you believe) have been off limits to Chinese investment and even created a recent geopolitical faux pas for Washington.

In mid-May news broke that Michael Smith, CEO of Freeport LNG, said that the Department of Energy (DOE) had advised American companies not to allow Chinese companies to invest in US LNG export projects. He said he was encouraged during the federal approval process to avoid inviting Chinese participation in case of a political backlash. Smith said that the advice contributed to a lack of lucrative US gas export deals with Chinese companies. What ensued was awkward backpedaling and obvious damage control by Smith over his remarks and a denial by the DOE.

Yu addressed the Freeport blunder in his remarks last week, but only in passing. He said that previous talks over investing in Freeport LNG’s project in Texas fell through. After Smith’s remarks last month, Chinese media as well as Chinese authorities were mostly silent over the issue. However, that doesn’t preclude the distinct possibility that the situation was addressed through diplomatic channels, which would have led to Yu’s confident if not bold remarks last week that China not only wants to buy US LNG but wants to be a shareholder.

Securing US LNG and minority ownership in US LNG projects would not only be a geopolitical victory for Beijing, it is a pragmatic move by the country’s energy planners to diversify its global gas portfolio, even as the country tries to use more natural gas to replace dirtier burning coal used for power generation and offset increasing and record amounts of air pollution.

Since the US will soon be the world’s third largest LNG exporter in terms of total capacity, it makes sense for China to not only procure US gas but invest in US LNG projects. And for the US, Chinese involvement would help new projects (perhaps marginal projects) lock in long-term off-take agreements that are needed to secure final investment decisions (FID) so projects can go forward. Despite last months’ remarks by Smith and a still chilly reception from many politicians in Washington, US-Chinese joint LNG development and investment could be a win-win situation both on the energy landscape and geopolitically.