China is turning to ExxonMobil to help meet its insatiable appetite for cleaner energy as the country moves away from coal.
Despite lingering trade tensions between Washington and Beijing, Exxon (XOM) on Monday announced a 20-year agreement to send liquefied natural gas to China.
The deal calls for China’s Zhejiang Provincial Energy Group to purchase 1 million metric tons of LNG per year from Exxon, America’s largest energy company. Exxon did not say whether the LNG, which is super-cooled natural gas that can be shipped, will come from the United States or one of its overseas projects.
The timing of the agreement is notable: China imposed a 10% tariff on US LNG in September as part of the trade war between the world’s two biggest economies. The tariff remains in place even as tensions have cooled and officials try to forge a breakthrough agreement.
Even though the purchase size is relatively small, Exxon hailed the LNG deal as an “important milestone,” and the company emphasized its “long-term commitment to China.”
“The new Exxon contract is more significant because of the buyer than the volume,” said Ira Joseph, global head of gas and power analytics at S&P Global Platts.
As of mid-March, just one LNG vessel that left the United States in 2019 went to China, according to Reuters shipping data.
Able buyer, well-supplied seller
If not for the trade war, the United States and China would seem to be a perfect fit.
The shale boom has created an abundance of natural gas in the United States. There’s so much natural gas, in fact, that American companies are scrambling to build more than two dozen facilities that can export LNG.
The United States is the world’s fastest growing exporter of LNG. It’s already the No. 3 LNG producer, behind only Qatar and Australia. By 2022, the United States could be No. 1, according to Platts.
China, meanwhile, is the world’s fastest-growing importer of LNG. The cleaner-burning fossil fuel is gaining market share in China as the country shuts down older coal plants that have contributed to pollution.
“By substituting coal for LNG, they are trying to help alleviate the environmental problems they’ve had,” said Joseph.
China is also leaning heavily on solar and wind power as cleaner, and sometimes cheaper, alternatives to coal.
Exxon’s LNG ambitions at home and abroad
Exxon first announced last year that it had reached a framework agreement to sell LNG to Zhejiang. Even after the deal became official Monday, though, the company declined to say where the LNG will come from.
Exxon can source the LNG from one of several different projects that are at varying stages of development.
While Exxon doesn’t produce LNG in the United States right now, that will change soon.
In February, Exxon and its partner Qatar Petroleum announced plans to proceed with Golden Pass LNG, an export project located in Sabine Pass, Texas. The $10 billion project, slated for completion in 2024, is expected to eventually have the ability to export about 16 million tons of LNG each year.
Exxon also has LNG projects in Australia, Mozambique, Papua New Guinea and Qatar, according to the company’s latest annual report.
The Papua New Guinea LNG project announced a separate deal with a Chinese company earlier this month. Unipec Singapore, a unit of China’s Sinopec, has agreed to purchase almost half a million tons of LNG a year from the Papua New Guinea project.
Off-take agreements, like the one announced on Monday, are typically supplied by LNG projects that are still in development.
“It’s safe to say it will be from one of the projects that have not yet materialized,” said Pavel Molchanov, an energy analyst at Raymond James.,
Beyond the United States, China has turned to Australia and Qatar to meet its LNG needs.
“From the standpoint of Chinese importers, it makes no difference where it comes from,” said Molchanov.
