China’s Gas Tariffs Are a Permian-Size Problem for Oil
https://www.bloomberg.com/view/articles/2018-08-06/china-s-lng-tariffs-could-slam-permian-oil-producersAugust 6, 2018
...The latest bit of America’s energy sector to feel the over-the-shoulder lash is the liquefied natural gas-export business. On Friday, LNG joined the list of goods that China will hit with tariffs in retaliation for U.S. ones. This is problematic when you consider China has taken 13 percent of U.S. LNG exports (and more like a quarter last winter), according to Bloomberg New Energy Finance.
As I wrote here about U.S. oil, a tariff imposed by one of the world’s largest importers of fuel will act as an effective tax on exporters. China buys U.S. LNG on the spot market, so its demand is very sensitive to the spread between benchmark U.S. natural gas prices and Asian prices. That spread has to absorb the cost of converting U.S. gas into a liquid (typically a 15 percent premium) and shipping it across the world (about $2 per million BTU via the Panama Canal, according to BNEF’s LNG Shipping Calculator).
Using futures prices for Henry Hub natural gas and the Japan-Korea Marker (JKM) as proxies, here’s what happens to the theoretical netback, or margin, of an exporter on the U.S. Gulf Coast selling LNG to Shanghai if a 25 percent tariff is imposed:
...The really fun thing about the LNG trade, though, is that, like with most other trades, everything is connected. So apart from the LNG sector, these tariffs could really cause problems for a bigger business up the pipe: the Permian basin’s oil producers.
How so? A side-effect of the surge in Permian oil output is a similar surge in associated gas that comes up alongside it. As long as oil prices encourage more fracking for oil, the gas essentially comes for free. This is a problem in west Texas because, short of coming up with an ingenious method allowing local residents to breathe the stuff, there isn’t enough demand there to take it all. Hence, gas priced in Waha, Texas, trades at a discount of almost 80 cents per million BTU, or 28 percent, to the Henry Hub benchmark....