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The Trump administration frequently pushes natural gas exports in high-level talks with Beijing. Most recently, after threatening to impose tariffs on Chinese technology imports, some administration officials are stating that the tariffs can be reduced if China buys more U.S. natural gas.¹ The Trump administration is pitching a very simple argument: If China imports more natural gas from the United States, that will help rebalance the U.S.-China trade deficit—which rose to a record $375.2 billion during President Donald Trump’s first year in office—and generate American jobs.² In reality, that argument reflects a deep misunderstanding about how today’s global energy markets actually work.

At first glance, the United States and China do have good synergies in this sector. China is consuming more natural gas than it can produce and seeking new imports; the United States is the world’s largest producer, and the Trump administration wants to send more of that production overseas. Trump routinely uses his meetings with President Xi Jinping and other Asian leaders to push natural gas export deals. That push played a role in preliminary U.S.-China deals inked last November and is generating excitement on both sides of the Pacific about a potential U.S.-China natural gas trade boom.

Behind the hype, however, market realities suggest this will not pan out as promised. This report covers the following five factors that American observers need to understand about the Trump administration’s push to export U.S. natural gas to China:

1. Beijing is currently leveraging natural gas imports to fill a reform gap: Demand-side reforms have thus far been more successful than the supply-side. If Chinese leaders can push forward needed reforms on the supply side, the nation’s import dependence may decrease.
2. China already has 26 supplier nations, and the shipments it receives from the United States are more expensive than 83 percent of its import supply chain.³
3. The United States has a geographical disadvantage exporting to China and is better placed to serve other growing markets.
4. The Trump administration is pushing U.S.-China natural gas investment deals that ignore current market trends.
5. The Trump administration’s fossil fuel obsession risks forfeiting a much bigger strategic game in clean energy technology.

Chinese President Xi has big ambitions. His vision for an ideal future U.S.-China economic relationship is one in which the United States exports commodities to China while China steadily edges the United States out as the dominant player in global high-tech markets, including clean energy markets. In that scenario, the United States gets the lower end of the value chain and China dominates the higher end, thus winning the best jobs. Chinese leaders know that, globally, the world is already installing more new renewable energy generation capacity than new fossil fuel-based capacity.⁴ Even major oil and gas exporters such as Saudi Arabia and the United Arab Emirates are investing billions in renewables—they see where the market is headed and do not want to be left behind. Chinese leaders view clean energy as a major battlefield in their nation’s quest to surpass the United States as the new high-tech superpower, and entertaining the Trump administration’s fossil fuel export initiatives is a useful tactic for keeping the United States occupied on the sidelines while China runs the field.

There is little question that China’s rising natural gas consumption is an exciting trend. If Beijing leverages natural gas to replace coal and reduce the nation’s overall fossil fuel emissions—neither of which is guaranteed—that could be good for the planet. However, this trend is unlikely to generate game-changing jobs for the United States, and the Trump administration’s determination to promote fossil fuel exports at any cost undermines broader U.S. economic interests. If the administration accepts natural gas export promises from China in exchange for backing off from much broader U.S. trade complaints—as U.S. Secretary of Commerce Wilbur Ross is suggesting—that will undercut the U.S. economy even further.

Understanding these dynamics is critical for assessing what the current administration’s U.S.-China natural gas initiatives are likely to produce over the longer term. 

Demand-side reforms have thus far been more successful than the supply-side

China is a major natural gas producer and consumer. For decades, Beijing controlled pricing and activity on both sides of the market—production and consumption—and those controls hindered natural gas development in China. Natural gas currently accounts for just 7 percent of China’s total energy consumption compared with 29.2 percent in the United States, 23.7 percent in Germany, and 22.5 percent in Japan.⁵ Over the past five years, Chinese leaders have rolled out a series of policy reforms designed to relax the old controls, create more room for market competition, and encourage more production and consumption.

Those reforms have been particularly successful on the consumption side. Beijing is aiming for natural gas to account for 10 percent of the nation’s energy mix by 2020—up from 7 percent at year-end 2017—and 15 percent by 2030.⁶ To make that happen, Beijing is rolling out an array of environmental policies that provide new incentives—and in some cases mandatory requirements—for switching to natural gas as a substitute for more emission-intensive fossil fuels. That effort began with the 2013 Air Pollution Control Action Plan, which required major urban areas along China’s eastern seaboard to reduce their overall coal consumption, close down coal-fired industrial boilers and power plants, and bring in natural gas and renewables as substitutes by 2017.⁷ That 2017 deadline, however, triggered major natural gas supply shortages last fall as some city planners—anxious to meet their 2017 deadlines—shut down coal-fired power before they had substitutes in place to cover winter heating needs.⁸

In addition, Chinese leaders are also rolling out policies to encourage natural gas use for transport. Transport emissions account for around 25 percent of air pollution in China, and Beijing views switching to natural gas vehicles—both liquid and compressed natural gas—as a key lever for reducing pollution.⁹ China had more than 5 million natural gas vehicles in 2017—accounting for more than 20 percent of the global total—and Beijing is pushing to double that to 10 million by 2020.¹⁰ To meet that target, local governments across China are providing consumers with a variety of subsidies for natural gas fuel and vehicle purchases.¹¹

These demand-side policies are having an impact. Between 2013—when Beijing first launched the Clean Air Action Plan—and 2017, China’s total natural gas consumption grew 41 percent, averaging roughly 9 percent growth per year.¹² As consumption rises, Beijing is also rolling out three major supply-side reforms to drive domestic production—China has both onshore and offshore reserves—and imports.

First and foremost, Chinese leaders are taking steps to liberalize natural gas pricing. The first big shift occurred in July 2013, when Beijing rolled out a new pricing model for industrial-use gas that linked city-gate prices—or municipal-level distribution prices—to international market rates for fuel oil and liquid petroleum gas.¹³ Central planners used those international rates to set price ceilings and then allowed buyers and sellers in China to negotiate up to that ceiling. Beijing then took an even bolder step with unconventional gas, which is generally more expensive to develop in China. Starting in the second half of 2013, Beijing fully liberalized pricing for shale gas, coal bed methane, coal-to-gas, and imported liquefied natural gas (LNG)—suppliers in those sectors could charge whatever buyers were willing to pay.¹⁴ Over time, Beijing has also gradually broadened the band in which conventional natural gas prices could fluctuate, allowing more room for buyers and sellers to negotiate prices based on supply and demand.¹⁵

Price reform is still a work in progress, but these measures are already having an impact. Before the reforms commenced, China’s city-gate prices were well below international rates.¹⁷ That was a serious problem for China’s oil and gas majors who were signing import contracts with foreign suppliers and, due to the price spread between international and domestic rates, selling the imported gas at a loss in China. In 2012, PetroChina lost $6.7 billion importing natural gas into the country and selling it at state-controlled rates.¹⁸ In 2013, PetroChina’s losses increased to $7.9 billion—including a $4.6 billion loss on pipeline imports from Central Asia, a $67 million loss on pipeline imports from Myanmar, and more than $3.2 billion in losses on imported liquefied natural gas.¹⁹ Those losses declined when Beijing implemented the price reforms and domestic prices began to more closely track international rates.²⁰ On the consumer side, however, the initial reform-induced price increases dampened consumption, and that created an entirely different headache for Chinese leaders given their goal to expand natural gas use.²¹ Since 2014, a steady decline in global oil and gas prices has made it possible for Beijing to liberalize pricing while also maintaining affordability for end users.²² If global prices trend in the opposite direction, that will make things difficult for Beijing, but that is unlikely given that the global natural gas market appears to be entering a period of oversupply.²³

Second, in addition to price reform, Beijing also opened up liquefied natural gas imports for private sector participation. China’s state-owned enterprises have a monopoly on pipeline imports and domestic production—they dominate the best gas plays—but private enterprises can now enter the upstream market via LNG. If those imports entailed the kind of multibillion-dollar losses PetroChina suffered in 2013, there would be few takers; however, from 2014 onward, the combination of declining global LNG prices and an increasingly liberalized domestic pricing regime made the LNG import business a more favorable proposition. From 2014 to 2016, China’s average LNG import price fell from an all-time high of $12.64 per thousand cubic feet to $7.05 per thousand cubic feet; in 2017, prices ticked up 12 percent to $7.91 per thousand cubic feet but remain much lower than previous years.²⁴ Private companies have two options for market entry: utilize existing terminals or build their own. Beijing’s 13th Five-Year Energy Development Plan, issued in 2013, encouraged private companies to invest in the natural gas sector, with one private company even permitted to construct and operate its own import terminal beginning in 2012.²⁵ In 2014, Beijing ordered the nation’s state-owned oil and gas majors to grant private companies access to their unused import terminal capacity so that more private companies could take advantage of falling global LNG prices.²⁶ Back in 2012, China had just six import terminals across six ports with a total import capacity of less than 3 billion cubic feet per day (Bcf/d); by year-end 2017, China had 17 terminals across 14 ports with a total 7.4 Bcf/d of capacity.²⁷

Third, Beijing is taking steps to gradually relax state-owned enterprise control over domestic production. If Chinese leaders can break open their nation’s upstream sectors, that will be the real game-changer. The U.S. Energy Information Administration estimates that China may have as much or more shale gas than the United States, but development has been sluggish.²⁸ Overall, China’s annual domestic production growth has decelerated from more than 19 percent in 2005 to less than 12 percent in 2010 and just over 2 percent in 2015.²⁹ Chinese leaders are hoping to turn that trend around. Beijing’s 13th Five-Year Plan for Natural Gas Development targets 7.3 trillion cubic feet of production by 2020, up from 4.8 trillion in 2015.³⁰ In 2016, year-on-year growth in China’s reported domestic production bounced back to just more than 5 percent.³¹ In the United States, private sector competition played a key role in driving some of the technology and process innovations that unlocked shale gas development.³² For that to happen in China, Beijing will have to break down an array of market barriers that currently stifle competition in the nation’s upstream sectors. For example, state-owned companies control the best oil and gas plays and, in some cases, sit on them without either developing them or allowing other companies to do so. China’s geological data is classified, so private companies and investors have no idea how much natural gas the country has or where it is located. Plus, state-owned companies control the pipelines and often either deny pipeline access to private companies or charge exorbitant rates, thus making it hard to bring those extra supplies to market.

Beijing is taking steps to address these problems, but progress has been slow, so they are currently relying on imports to meet the nation’s rising demand.³³ Going forward, however, if Chinese leaders get serious about supply-side reform, the next unconventional gas revolution could occur in China. As of 2017, China is already the third-largest global shale gas producer behind the United States and Canada.³⁴ Natural gas exporters should take China’s production potential into account—and Beijing’s growing determination to unlock that potential—when making investments that hinge on a continued rise in Chinese import demand.

China has been a net natural gas importer since 2007, and the gap between domestic production and consumption has grown steadily since then. China imports natural gas via a combination of overland pipelines and seaborne tankers.³⁵ In 2017, 55.7 percent of China’s natural gas imports by volume came in via LNG tanker and 44.3 percent via overland pipeline.³⁶

On the seaborne LNG side, China’s first imports came from Australia in 2006.³⁷ In the late 2000s and early 2010s, smaller suppliers—including Algeria, Yemen, and Nigeria—also shipped LNG to China, but as of 2017, only Australia, Qatar, Malaysia, Indonesia, Papua New Guinea, and the United States occupy China LNG import market shares above 3 percent. The United States did not join China’s LNG supply chain in earnest until 2016. U.S.-to-China year-on-year LNG exports grew 217 percent in 2016 and 670 percent in 2017, at which point the United States edged out Nigeria to become China’s sixth largest LNG supplier. Australia has retained its position as China’s top LNG supplier by volume, except for the period from 2012-2015 when a bump in Qatari exports overtook Australia’s.³⁸

On the pipeline side, China borders multiple onshore natural gas supply regions, and the nation’s state-owned energy companies have invested billions of dollars to bring in natural gas via overland pipeline.³⁹ China generally pays less for pipeline gas than it does for seaborne LNG. For example, in 2017 China paid an average US$5.75 per thousand cubic feet for pipeline gas and an average US$7.91 per thousand cubic feet for seaborne LNG.⁴⁰ Currently, China’s biggest pipeline supply route is from Turkmenistan, which supplied 80.5 percent of China’s piped natural gas imports in 2017. The rest of China’s pipeline natural gas imports come from Uzbekistan (8.5 percent), Myanmar (8.3 percent), and Kazakhstan (2.7 percent).⁴¹ Once the Myanmar and Kazakhstan pipelines came online in 2013, pipeline gas surpassed LNG as China’s primary import source but that reversed again in 2017, following Turkmenistan pipeline supply problems and a dip in global prices that narrowed the price gap between LNG and pipeline gas and thus made seaborne LNG more economical for Chinese buyers.⁴² China’s first pipeline from Russia is scheduled to come online in December 2019; once that pipeline is flowing, Russia is expected to become China’s top overland supplier, bumping Turkmenistan from the number one spot.⁴³

Overall, in 2017, China imported 3.35 trillion cubic feet of natural gas—of which 1.48 trillion cubic feet came in via pipeline and 1.87 trillion cubic feet as LNG—making China the world’s second-largest natural gas importer, behind Japan.⁴⁴ In 2017, China’s top five natural gas suppliers by volume—pipeline gas and LNG combined—were Turkmenistan (accounting for 36 percent of total imports), Australia (25 percent), Qatar (11 percent), Malaysia (6 percent), and Indonesia (4 percent). Beijing wants the nation’s supply mix to prioritize diversity—importing from multiple nations across a variety of transport routes and contract structures—and affordability.⁴⁵ A diverse mix of suppliers and transport routes serves as a hedge against supply shocks and also provides multiple ports of entry to channel natural gas into different Chinese regional markets.⁴⁶ When China first became a net importer in 2007, it received shipments from just four nations; today, 26 nations supply natural gas to China.⁴⁷

U.S. natural gas exports to China did not begin in earnest until August 2016, when Houston-based Cheniere Energy began shipping LNG to Chinese buyers from its Sabine Pass liquefaction facility.⁴⁸ In 2016, China imported 17.2 billion cubic feet of LNG from the United States.⁴⁹ In 2017, that increased to 100 billion cubic feet,⁵⁰ making the United States China’s ninth-largest natural gas supplier behind Papua New Guinea. All of the U.S.-to-China shipments departing in 2017—29 total cargoes totaling 100.01 billion cubic feet⁵¹—came from Cheniere’s Sabine Pass facility.⁵² Cheniere has a unique toll gate business model: The company is not directly involved in production. Instead, it purchases gas from U.S. producers, liquefies it at Sabine Pass, and sends it overseas. When Cheniere signs long-term contracts, it is not agreeing to produce a set amount of gas but rather to procure and liquefy it on the buyer’s behalf. In February, Cheniere Energy inked a long-term deal with China National Petroleum Corporation to supply up to 1.2 million tons—58.4 billion cubic feet—of LNG per year until 2043.⁵³ Cheniere can fill those shipments with a combination of spot market purchases—taking advantage of price dips wherever possible—and longer-term supply contracts with producers willing to supply larger shipments to Cheniere at wholesale rates.

Although Cheniere’s unique business model is doing well exporting limited amounts of LNG to China, overall, the United States has not played a major role in China’s supply chain because U.S. LNG is generally not cost competitive in China. In 2017, China paid an average US$8.65 per thousand cubic feet for imports from the United States and an average US$6.95 per thousand cubic feet for all other natural gas imports. Based on 2017 pricing, U.S. imports are more expensive than 83.6 percent of the natural gas China obtained from other suppliers.⁵⁴ Within China’s seaborne LNG supply chain alone—not including pipeline gas—U.S. imports are more expensive than 73.8 percent of China’s imports from other suppliers.⁵⁵

The United States is better placed to serve other growing markets

The problem is that, although U.S. production costs are relatively low—U.S. benchmark prices have averaged $3.14 per thousand cubic feet since March 2014 compared with $4.35 per thousand cubic feet in Australia—transport costs from the U.S. Gulf Coast ratchet up the price beyond what China would pay for comparable shipments from Australia. ⁵⁶ U.S. LNG export infrastructure is clustered along the Gulf Coast because those ports are closest to the nation’s existing pipelines and other onshore natural gas infrastructure.⁵⁷ Shipping LNG from the U.S. Gulf Coast to China, one way, currently costs approximately twice as much as it does from Qatar and almost three times as much as from Australia. Geographical distance is the problem: When transporting natural gas to Shanghai, tankers from the U.S. Gulf Coast travel 10 days longer than tankers from Qatar and 15 days longer than tankers from Western Australia.⁵⁸ To reach Asian markets, tankers leaving Gulf Coast terminals must choose among four major maritime routes: Panama Canal, Suez Canal, Cape Horn in South America, or the southern tip of Africa. Even the shortest route from the Gulf Coast to Asia—