As Trump spars with China, future of huge market for U.S. energy falls into doubt
WASHINGTON – Following a meeting in Beijing two years ago, President Donald Trump and China’s Xi Jinping heralded the beginning of a new era in energy trade between the two nations.
Officials announced plans for the Chinese to invest more than $100 billion in U.S. projects, including a pipeline and liquefied natural gas export facility in Alaska and a complex of natural gas and chemical projects in West Virginia. A few months later, Houston-based Cheniere Energy announced it had signed a 25-year deal to sell liquefied natural gas to the China National Petroleum Corporation.
But what appeared to be the beginnings of a booming new market for U.S. oil and natural gas is rapidly unraveling amid increasingly tense trade negotiations between the world’s two largest economies. At a Senate hearing last month, senators questioned experts on why the Alaskan and West Virginia investments had not materialized and whether the Chinese government might have ulterior motives in agreeing to invest in their states.
“In my state West Virginia, they said they’re going to invest $83 billion over 20 years. That a tremendous carrot for a small state,” said Sen. Joe Manchin, D-W.V. “What would be their interest? I cannot find out one iota about their [memorandum of understanding]. I cannot get a direct answer.”
China has long loomed large for U.S. energy companies. With a population of 1.4 billion people and climbing, China is the world’s fastest growing energy market. Last year, China surpassed Japan as the world’s largest importer of natural gas while also importing more oil than any country in the world — at a time when other major economies such as Japan, Germany and the United States are shrinking crude imports.
This should be good news for U.S. oil and gas producers, who are eager to find new markets for their booming fields in Texas and the Appalachian region. But as China’s global ambitions put the country in increasing conflict with the United States, larger diplomatic and economic tensions are complicating efforts to expand the energy supply route to East Asia.
At the forefront is the burgeoning U.S. LNG industry, which currently has close to 30 export projects in various stages of development, primarily along the Gulf Coast, according to the Federal Energy Regulatory Commission.
“The U.S. has a lot to offer in new supply and China has one of the largest markets. They’re an ideal fit in terms of trading partners,” said Alex Munton, an analyst with the research firm Wood Mackenzie. “But with these tariffs in place, it’s very difficult to see Chinese companies sign up for long-term, contracted supply.”
And the stakes could go higher. China last year was the third largest importer of American oil after Canada and South Korea, but analysts say China could target U.S. crude in its next round of retaliatory tariffs. That would mark a rapid reversal from only a few years ago, when state-owned Chinese companies were investing heavily in U.S. oil and gas projects, primarily in Texas.
In 2010, the China National Oil Company paid $1.1 billion for a 33 percent stake in Chesapeake Energy’s oil and gas leases in the Eagle Ford Shale in South Texas. Two years later, the Chinese Investment Corporation invested $500 million in Cheniere Energy’s $5.6 billion LNG export facility in Louisiana, the first of its kind in the continental United States. Then in 2013, the petrochemical company Sinopec invested $1.7 billion in Pioneer Natural Resources’ drilling operations in West Texas.
These days, China’s investment dollars are flowing to developing nations in Central and Southeast Asia, Africa and South America through their Belt and Road Initiative, which critics see as a bid to establish Chinese dominance over poorer countries.
Compared to the United States, where investments by foreign nationals face rigorous review by the Committee on Foreign Investment in the United States, developing countries present a far easier regulatory process for Chinese investment, said Jennifer Turner, director of the China environment forum at the Wilson Center, a Washington think tank. The committee, comprising members from various federal agencies and chaired by the Treasury secretary, reviews the national security implications of foreign investment.
“Why the heck would they want to come to the U.S.? They’re going like gangbusters all around the world in energy investments,” she said. “They like developing countries where they’d just march in.”
Even as investment has slowed down here, scrutiny on Chinese activities in the United States has not. At the Senate hearing last month, Melanie Hart, a senior fellow at the think tank Center for American Progress, warned senators that China’s overtures to invest in U.S. natural gas could be a ruse to gain leverage over U.S. officials as they take aim at China’s expansionist industrial policies, including the acquisition of American technology to benefit its own companies
“It could be a brilliant diplomatic move,” Hart testified. “Beijing is looking for ways to ease the frictions without giving up its problematic industrial policies. If China can leverage LNG purchases to do so, that will be a massive strategic victory for Beijing.”
The FBI is warning U.S. companies and research institutions to step up their security against Chinese agents, who they say are targeting industries across the board, including energy, tech, health care and agriculture. Last month, a 54-year-old Houston man, Shan Shi, was convicted of conspiring to steal trade secrets from an engineering firm that produces a specialized form of foam used in offshore drilling on behalf of the Chinese government.
“Nearly every FBI field office has economic espionage cases leading back to China,” said Connor Hagan, a spokesman for the FBI’s Houston office, which investigated Shi. “There’s no doubt the U.S. is being exploited by [China].”
For China maintaining access to an affordable, reliable supply of energy is critical as it seeks to expand its economy, said Justin Pettit, a vice president at the consulting firm IHS Markit. To date. the Chinese have largely relied on their own coal supplies, which China produces more of than any nation in the world.
But concerns over climate change and air pollution are driving the Chinese toward cleaner forms of energy. Even with recent improvements, air quality in Beijing still ranks among the worst in the world.
That has meant a greater reliance on natural gas from abroad, primarily from Turkmenistan in Central Asia and Australia. That, however, could soon change. China has invested heavily in developing its own vast shale fields, hoping to replicate the success that American firms have had in Texas and other shale-rich regions. So far, Chinese firms doing most of the exploration have struggled. They are focused on mountainous areas that are difficult to access and require far deeper drilling depths than in the United States. But as the government looks to new areas and lifts some restrictions on foreign oil and gas companies, there is plenty of potential to develop China’s energy resources, Petit said.
“It’s crazy for them to be importing so much oil and gas,” he said. “With the trade war issues, security of supply has become much more important.”