Will trade wars and geopolitics wreak havoc with the U.S. oil and gas industry? While trade groups like the American Petroleum Institute have expressed alarm about the impact of escalating tensions between the U.S. and China, experts told Hart Energy that the situation is not as dire as feared.

In fact, the tense situation could ultimately breed opportunity.

Among the trade complications that have recently developed:

  • China announced on Aug. 3 that it is considering a 25% tariff on imports of U.S. LNG;
  • European allies seem to be moving closer to allowing construction of Russia’s Nord Stream 2 natural gas pipeline; and
  • Exemption requests by energy companies to tariffs on imported steel have been denied.

George Popps, Singapore-based director for LNG research at Stratas Advisors, agreed that the tariffs would only have a negative effect on the competitiveness of U.S. LNG in China. It would not, however, mean Gulf Coast export terminals would need to close shop.

“In 2017, [Cheniere Energy Inc.’s] Sabine Pass’s 30 cargoes destined for China averaged $4.17/MMBtu at export,” he told Hart Energy in an email. “A 25% tariff put the price at $5.21/MMBtu, plus shipping. Stratas Advisors believes that cargoes delivered into China below $7/MMBtu can remain competitive.”

That scenario assumes that China, with growing demand for LNG, will follow through with implementing the tariff and keeping it in place. Popps said that is far from a certainty.

What is certain, he said, is that a wave of new demand from emerging markets in Asia could very well overwhelm export capacity in the next five to eight years.

“There is a significant gap between what is needed and what is actually under construction,” he said. “Looking beyond current construction and positive FIDs [final investment decisions], we can reasonably expect as much as 75 mtpa [million tonnes per year] of liquefaction capacity that will need to be added to the global portfolio by 2025-2026.”

Qatar’s planned expansion could cover about one-third of that, he said, but East Africa’s onshore projects won’t produce LNG until 2024 at the earliest. That puts North America in position to expand by 30 mtpa to 40 mtpa to meet global demand. By 2030, it may be necessary to push that total to 50 mtpa.

In Europe, the Nord Stream 2 pipeline, which would deliver natural gas from Russia’s Yamal Peninsula in Siberia to Germany, where it would link with existing infrastructure to supply Western Europe, raised the ire of President Donald Trump. The president scolded Germany in early July for pursuing completion of the $11 billion project instead of relying on imports of U.S. LNG.

The George W. Bush administration opposed construction of the original Nord Stream pipeline, and both the Obama and Trump administrations have opposed Nord Stream 2 because of concerns that European countries will be dependent on Russia for natural gas, which could lead to national security risks. In 2017, Russia provided between 50% and 75% of Germany’s natural gas.

To Gabriel Collins of the Baker Institute Center for Energy Studies at Rice University, Nord Stream 2 would not be a security threat with implementation of a policy known as “gas geoeconomics” that would define the pipeline as just one source of fuel among many.

Collins co-authored a study with colleague Anna Mikulska that examined strategic choices available to the U.S. in countering Nord Stream 2. The two argue in favor of gas-on-gas competition resulting in a market that benefits all.

“The gas geoeconomics strategy is not just about LNG,” Collins told Hart Energy. “It’s also about helping support accelerated construction of interconnector pipelines within Europe with the aim of creating a deeper, more fungible, more freely traded market.”

That market would ultimately immunize the continent against potential Russian energy coercion, at least to a greater extent than what is happening now.

When Nord Stream 2 is complete, Collins said, there will be the potential for enormous quantities of natural gas to flow into Germany, overwhelming some of the pipeline links there and in central Europe. If gas demand remains stable or grows, price differentials will materialize that will stimulate construction of more pipeline links as commercial parties move to capture the opportunity.

“The gas can come from any source,” Collins said. “You want as broad and deep connectivity as possible. The reality is that a methane molecule, whether it comes from fields in the Yamal peninsula of Siberia or whether it comes from Texas, it’s all CH4.”

U.S. investment in the construction of these interconnector pipelines would support energy diplomacy and are more likely to succeed, the authors believe, than sanctions against European entities that back the pipeline or disengagement.

But how would that work with the Trump administration’s “America First” approach? Collins said that depends on the definition of America First.

If the approach is to take policy steps that will advance the broad national interest, gas geoeconomics works well. It taps into market forces in the most effective way possible and is molecule indifferent, so that one source of gas is not favored over another. That approach is how U.S. commercial LNG sellers like Cheniere and, soon, Freeport LNG operate.

If the approach is mercantilist and the goal is simply to bolster the sale of one source of gas—U.S. LNG—then it will likely meet resistance from buyers, in this case the European partners.

“When you think about how the Trump administration thinks about these issues, I suspect it’s not particularly commercial, it’s very much of a mercantilist ‘let’s replace Russian molecules with American molecules,’” Collins said.

“That’s an approach that’s not realistic and it’s one that you would cut yourself off at the knees,” he said. “You would have trouble getting the domestic support within some of the different European recipient countries that you really need for gas geoeconomics to work.”

Joseph Markman can be reached at jmarkman@hartenergy.com or @JHMarkman.