Edward Chow is a Senior Associate at the Center for Strategic and International Studies (CSIS), and an Adjunct Professor at Georgetown University. An expert on international energy markets and policy, he has acted as an advisor to governments, corporations and financial institutions with stakes in the industry. In our interview with him at Flame, we talked through the impacts on the LNG industry of the US China trade war, and the long-term political ramifications of the resumption of US sanctions on Iran.
“Markets don’t particularly like uncertainty. They get nervous when there’s too much uncertainty around the world.”
Q: Let’s start with the US China trade war, and the tit-for-tat sanctions that we’re seeing. How do you assess the situation?
Chow: I think everyone was expecting an agreement by now, so there’s great disappointment. We’ve seen that reflected in the market over the last couple of days. Both sides had indicated that they were reaching agreement. And then about a week ago – or ten days ago now – Trump tweeted, and then it looked like there wasn’t going to be an agreement.
But people were still hoping when the vice premiere of China visited at the end of last week that there was going to some kind of progress at a minimum. Having seen none, and then the American side on Friday said that they’re going to not only increase the tariffs on the goods already sanctioned, but maybe expand the sanction list. And then on Monday the Chinese declared that they are going to retaliate at the beginning of June if no agreement is reached. So I think it spooked the market quite a bit.
In energy terms, there is some specific impact. The Chinese were starting to buy American crude oil, the Chinese were starting to buy American LPG, American condensate – there was great potential for the Chinese committing to long term LNG contracts to buy American LNG. That’s all been put on hold, if not frozen for a while, until the overall trade dispute is resolved.
I think from an American energy industry standpoint, this is most unfortunate. An area where it seemed like there was great potential for cooperation is not going forward as a result of the overall trade relationship. This is particularly true for new American LNG project promoters. Because what they need is long-term contracts, twenty year or so commitments by credit worthy buyers to buy their output so that they can make their financial investment decisions, and can go to the bank to obtain financing and so on.
China of course is the growth market for LNG in the world. I mean there are other places, but not as big as China is. So they were all looking to China to anchor purchases for their projects, and that may be temporarily halted – and it may have longer-term implications.
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Q: What constitutes long-term, and how long can this last before the trust is gone?
Chow: Right, a couple of things. One is if they do cobble together an agreement by the G20 summit in Osaka, then maybe people will say well it was just brinksmanship on both sides, and it doesn’t damage the long-term relationship.
I think if it goes beyond that, even if they come to agreement again later, there is a risk from the Chinese standpoint that the US would be seen as an unreliable supplier. So you may buy spot cargoes from an unreliable supplier, because you’re not exposed in terms of risk very much, but just not a twenty year agreement. Because this is a country where a political decision unrelated to energy issues can affect the trade that you’re committing yourselves to.
Q: Do you think therefore that short-term political upsets can effect long-term contracts?
Chow: I think that they do, because if you say well, should I buy Australian LNG, should I support a project in Mozambique, the calculus is quite different. The US had a reputation of having a source of cheap gas domestically, and we’re a lawful country where a contract is a contract. But all this puts these conditions into question for China. Maybe they still exist for India or someplace else that we’re not picking a fight with, but if you’re a Chinese buyer would you make a long-term contract commitment or not?
Q: If not the US, where would China purchase its contracted LNG from?
Chow: We can see this even with the current tariffs (the Chinese placed a 10% tariff on US LNG into China as a retaliation against the current Trump tariffs on Chinese goods going to the US). Cargoes are already being rerouted.
If Chinese buyers that have already committed to buy US LNG cargoes were to import it into China, they’d have to pay a 10% tariff. But if they swap their cargo for Australian LNG, then they don’t pay the 10% tariffs. So even in the short-term tariffs are affecting LNG trade around the world, because the US and China are big players.
Q: We could talk about the US and China for a very long time.
Chow: Yes – and we will [laughs].
Q: Iran is obviously another big question. How do you assess Iran’s situation as an energy exporter, and Rouhani’s request for more support from European nations?
Chow: I have to say it’s a little bit surprising to me that the oil markets have not reacted as much to the threat of Iranian oil being off the market as might be expected – or to the reduction in Venezuelan crude. Because of the economic and political problems there, I would have thought that oil prices would have gone up by quite a bit, and they haven’t.
Maybe that’s because the price had already discounted in these factors. But if you take a million barrels per day of Iranian oil off the market, it should have an impact. The market may also be assuming that Iranian imports won’t go to zero – that even under the Trump administration the Americans will provide some flexibility to Indian, China, Turkey and the other big buyers of Iranian crude. We don’t know.
I think it does raise a larger question on the overuse of American economic sanctions, particularly on energy. Because of the shale revolution, we’re not as affected as other countries (for example in Europe, which is more reliant on imports than the United States has been after the shale revolution). So the whole idea of American secondary sanctions on other people who choose to do business with sanctioned countries – for example Iran – I think that will become a big issue going forward. Not just in this instance, but going forward.
The EU has not made much headway with the special purpose vehicle they talked about in order to continue to be able to trade with Iran under the JCPOA nuclear agreement which they committed to (the Americans committed to it as well, but then withdrew under the Trump administration). But if the US keeps doing this, will people not figure out a workaround in the future, five, ten, twenty years from now?
The risk for American policy is that we might use this very heavy-handed weapon too often. Then the advantage conferred on the US by the dollar being the reserve currency around the world, the currency people choose to trade with because it’s the most convenient, would be eroded.
It’s not just this once – there have been other cases where Americans have used sanctions against North Korea, against the Russians, whatever. If these things keep increasing, then other big trading blocks, like the EU, like the Chinese, the Indians, the Japanese, the Koreans, will say well, we don’t want to be exposed to that (from their point of view capriciously by the Americans, so how do we work around it? I think that sanctions have been a very powerful tool in the American kit, but their effectiveness may be eroded over time if America is seen as not caring about other people’s interests, but only looking after its own.
Q: That’s a very interesting way of looking at it. It’s probably one of the things that Rouhani is banking on.
Chow: Well he’s certainly hoping. It wasn’t just a commitment, it was a UN sanctioned agreement with the European Union, with Russia, China, Germany, Britain and France – so what are you guys going to do now just because the Americans unilaterally withdrew from the agreement?
Q: Well we’re still in the sixty day period that he’s given them to have a think about it.
Chow: Yeah. But it creates uncertainty. Going back to the point about the short-term impact, it creates a lot of uncertainty, and markets don’t particularly like uncertainty. They get nervous when there’s too much uncertainty around the world.
