[NGW Magazine] Tariffs Cloud US-China Trade
US protectionism has led to a howl of protests from around the globe, as countries fear a cut in trade in some steel products; tubular goods are often mostly imported, so US industry will also suffer.
Donald Trump’s presidency has been pretty good for the US energy sector. Analysts often credit him not with creating the current energy boom – that started in large part owing to the earlier revolution of shale gas production thanks to unconventional extraction methods – but certainly helping it along by loosening regulations and emphasising hydrocarbon development.
America’s energy strength has been a frequent topic for him, though the ailing coal industry, not natural gas, is given the most airtime.
Industry in the US – and elsewhere – was given a shock on March 1, however, when the administration announced plans for substantial steel and aluminium import tariffs: 25% and 10% respectively. Responses and critiques came in from every area: the EU insists that it should be permanently and fully exempted; China – one of the primary targets – is preparing retribution; and domestic US industries of all stripes are raising the alarm of the damage the move could create.
This is not the first time in recent history that a Republican administration has done something similar: George W Bush tried the same thing in 2002. That led to US steel producers failing to meet demand, a ripple effect of raised prices across the board, 200,000 jobs being lost over the next year, according to a Trade Partnership Worldwide analysis. The tariffs were cancelled after just a year.
As for the current proposal, soon after announcement, a procedure for applying for exemptions was created, and implementation was delayed to allow for negotiations until May 1. This date has just passed, and it was announced immediately beforehand that trade negotiations with Canada, Mexico and the EU would be extended another 30 days. Finally, bilateral discussions with other countries are ongoing, One, with South Korea, is reportedly finalised.
Speciality products hit gas hard
Meanwhile, representatives of the energy industry, and natural gas in particular, are continuing to make their feelings loudly known.
Natural gas is especially vulnerable for two primary reasons: the industry is in a state of flux, with unconventional supplies in new places requiring extensive new pipeline routes, both to serve customers in the US – places like New England have had persistently higher prices, despite the gas revolution, because of access problems – and to reach coastal export hubs. The intoxicating lure of highly-priced LNG exports requires massive investment and high-tech steel for LNG hubs, exacerbating the issue.
Second, compared with older, more established industries, natural gas infrastructure often requires specific kinds of steel that are no longer made in the US. The tolerances required for materials to withstand corrosive operation, sometimes deep underground or in the sea, for 30 years, are met only by a few international companies. This is not to mention the steel for pipeline construction: the specifications may be lower but many more miles of it are needed.
US manufacturers have largely switched to making steel for uses like car manufacturing and appliances and it would take years to recreate the capacity.
All in all, according to the Association of Oil Pipelines, American steel producers are capable of meeting just 3% of the industry’s requirements, and so natural gas is particularly vulnerable to disruptions. There is, as mentioned, the possibility for exemptions to be granted to specific companies and their imports. The procedure was created shortly after the initial announcement, in response to complaints, but it leaves a lot to be desired.
According to reports, the application requires such information as the average consumption time of the particular steel, the number of days required to finish the job – things that are hard to predict – the number of days needed to ship the product from overseas, and the exact chemical makeup and specifications of the steel. A project will typically use a variety of different steel types, all which might need their own exemption, and some of these may be trade secrets.
One report from the Los Angeles Times notes that there have already been 650 public exemption requests from steel importers, another 5,000 made but not yet listed, and that reports will take 90 days to review. Given the uncertainty about whether the tariffs will even go into effect in their current state, this is a highly questionable procedure with million-dollar implications.
While bureaucracy drags on, impacts have been immediate. One commentator, from Canary LLC, a large oilfield services company, reported that prices for their high-end steel imports immediately rose 20% at the announcement. For a company that imports some $10mn in steel a year, to make wellhead and pressure control equipment, valves, and other precision drilling and operating machinery, this is a substantial problem, with the uncertain possibility of an exemption being too little, too late.
China cautiously explores options
China, arguably being one of the primary motivations for this move – Trump often speaks about their supposedly unfair trade practices and the US-China trade deficit – obviously has a unique position in the ongoing debate.
In the first week of May, US officials met Chinese counterparts in Beijing for trade discussions, with the threatened tariffs and Chinese countermeasures dominating proceedings. At time of press, current reports said Beijing thinks it can outlast the threat, given Trump’s more limited term in office and the ample uncertainty and pushback against this specific proposal. The Americans, meanwhile, want two things: the first is cuts to Beijing’s flagship ‘Made in China 2025’ programme – the forcing-ground for high-tech domestic development of robotics, electric cars, and artificial intelligence. If successful, this programme threatens American dominance of the sphere but cuts are apparently a no-go for Beijing.
Second, Washington wants a $100bn reduction to that often-referenced Trump position: the trade deficit. Beijing is apparently willing to discuss this, in the framework of buying more high-tech goods and more US oil, gas and other natural resources. The former may be off-limits for Washington, which has long been hesitant and blocked high-tech transfers owing to military concerns. Sales of more oil, gas and resources would however be welcomed by both sides.
China has, of course, been flexing its foreign investment might around the world. This is most obvious when a Chinese firm buys a high-profile New York or London piece of real-estate or land-mark African infrastructure project, but they are active in Western infrastructure as well, such as the planned EDF-owned UK power station at Hinkley Point.
In November last year, during Trump’s visit to Beijing, the two sides signed a pioneering deal: agreement for Alaska and three Chinese state-owned enterprises (China Petrochemical Corp (Sinopec), China Investment Corp (China’s sovereign wealth fund), and Bank of China) to develop Alaskan infrastructure, in return for rights to 75% of the gas produced from the project.
Although some described the agreement as a meaningless but politically important result for Trump, Alaska’s state gas corporation, Alaska Gasline Development Corporation, which is leading the project on the American side, hopes to begin construction next year and start shipments in 2024/2025.
The deal is noteworthy for its scale, for the potential for significant new American inroads into the Chinese market, and for the percentage of yield that China would be entitled to: 75% is far more than typical investments into Western energy projects.
It is, however, basically just a feasibility study. Numerous other companies such as ExxonMobil, ConocoPhillips, and BP have failed to develop the project for decades, owing to its difficulty and cost (reports of up to $65bn and ten years’ construction) compared with the huge amounts of cheaper gas south of the US-Canada border.
This type of deal is also falling out of favour in general, as partners move away from long-term fixed agreements and towards spot pricing and more flexible arrangements.
With this in mind, the steel tariffs have already caused substantial uncertainty and harm to a variety of US industries, particularly natural gas, but present some interesting opportunities regarding Chinese relations. If a package deal comes out of bilateral negotiations that includes harder commitment to projects like Alaska LNG, it could have substantial long-term positive repercussions for the US energy industry.
How exemptions proceed and how bilateral discussions play out, or even if the tariffs are put into place at all or cancelled fairly quickly, as in 2002, remains to be seen. A similar issue is the rumblings to ‘renegotiate’ the North American Free Trade Agreement, which has also prompted extensive pushback from industry and partner countries.
For the moment, with this administration, it appears the industry must take the good of deregulation with the bad of trade uncertainties. In a perfect example, Alaska LNG, which might not even exist unless the pressure pushes China to confirm its commitment, estimates that higher steel prices from the tariff could add $250mn to $500mn to the total project cost.
Ben McPherson
BP ready to sell gas to Alaska
The UK major BP has entered into a long-term gas sales agreement with Alaska Gasline Development Corporation (AGDC) committing a portion of BP’s share of 30 trillion ft3 of gas from Prudhoe Bay and Point Thomson to AGDC’s proposed 20mn metric tons/yr Alaska LNG Project on the Kenai Peninsula.
BP owns a 26% interest in and operates the Prudhoe Bay field – the largest in North America – and a 32% share of the nearby Point Thomson field, on Alaska’s North Slope. Together, the two fields will produce about 3.5bn ft3/day of natural gas, with most of that – some 2.6bn ft3/day – coming from Prudhoe Bay
“The Alaska LNG project has made significant progress over the past year, and BP is pleased to sign this agreement,” BP Alaska president Janet Weiss said May 7. “This is an important project for the future of the Alaska oil and gas industry.”
The gas sales precedent agreement – which captures key terms, including price and volume – comes just six months after US president Donald Trump and Chinese president Xi Jinping witnessed the signing in Beijing of a five-party point development agreement to advance the $43bn Alaska LNG project, which includes the terminal, a gas treatment plant on the North Slope and an 800-mile pipeline connecting the two.
“This gas sales agreement is a significant factor in progressing the Alaska LNG Project,” AGDC president Keith Meyer said. “We have secured the customers, we have progressed on the pipeline build with regulators and the finance community and now we have a commitment that there will be gas to sell and put through the pipeline.”
In November 2017, PetroVietnam Gas signed a memorandum of understanding with AGDC to collaborate on the supply of LNG to Vietnam, while in December 2017, Tokyo Gas signed a letter of intent on the sale and purchase of LNG from the Alaska LNG Project. No formal sale and purchase agreements have yet followed from either of those agreements.
Dale Lunan