LNG faces limited direct disruption from US tariffs

New US trade tariffs announced on 2 April are unlikely to cause any direct disruption to the LNG market because global LNG demand has become more inelastic in the past three years. But market participants warned of recessionary pressure and indirect effects on gas demand.

The key recipients of US LNG — the EU, Japan and South Korea, for example — may be considering responding to the new US trade policy with retaliatory tariffs, among other measures. But these are unlikely to include levies on US LNG imports, market participants said, which would limit any direct disruption on LNG trade flows in the Atlantic basin.

Europe has become much more reliant on LNG imports after losing the bulk of Russian pipeline imports. Europe last year imported 45pc of its LNG from the US, according to ship-tracking data from analytics firm Vortexa. And the EU would need quick LNG imports to replace Russian supply and fill its underground storage facilities this summer, with its combined gas inventory level at 33pc on 31 March, according to transparency platform Aggregated Gas Storage Inventory.

Traditional Asian importers such as Japan, South Korea and Taiwan are likely to seek an engagement approach other than direct retaliatory tariffs on US imports. US LNG purchases in the past often have been a means by which to reduce countries' trade surplus with the US. South Korea's energy minister expressed the country's interest in the 20mn t/yr Alaska LNG project in a visit in late March, while Taiwan's CPC signed an initial agreement for the project, according to Taiwan's Ministry of Economic Affairs.

Emerging LNG importer Vietnam was considering reducing import taxes on US LNG to 2pc from the present 5pc, according to state-owned PV Gas. The possibility of increasing US LNG purchases in the future also may be a key element in potential trade negotiations with the US aimed at reducing the 46pc tariffs on imports from Vietnam announced on 2 April, according to market participants.

LNG trade flows already had been reshuffled before the latest round of US tariffs, in light of China's retaliatory tariff of 15pc on US LNG imports. China halted LNG imports from the US in early February, by reselling its contracted US offtake in other markets and replacing it with cargoes of other origin, if needed.

But the tariffs have destabilised economies around the world, particularly those with large trade surpluses with the US, which are likely to reduce gas and LNG demand in different geographies.

Tariffs pose direct risks for US LNG projects

US tariffs on steel and aluminum imports, imposed on 12 March, present an immediate risk for US LNG developers, particularly for the five projects currently under construction and the six others expected to reach final investment decisions in 2025.

Metals represent up to 30pc of the cost of building an LNG export plant. Depending on the project's size, an LNG terminal could cost $5bn-$25bn, with steel used for pipelines, tanks and other structural frameworks. Although facilities can use some domestic supplies for construction, higher prices could result in delays to construction and final investment decisions in planned liquefaction projects (see table).

Delays to the planned 18.1mn t/yr Golden Pass LNG facility have already underscored how rising costs can upend construction timelines. Zachry, a lead contractor in engineering, procurement and construction work for the facility, filed for bankruptcy last May and exited the project. Pandemic-related inflation and supply chain delays have caused costs to surge by $2.4bn from the original $9.25bn contract, the firm said. Golden Pass, which once targeted first LNG in the second half of last year, now expects its first production in late 2025 or early 2026.

NextDecade's 17.4mn t/yr Rio Grande LNG project in south Texas had bought only 69pc of supplies for trains 1-2 and only 33pc for train 3 by late February, making the three-train project particularly vulnerable to higher steel prices.

Projects that are closer to completion may face less inflationary pressure. Equipment and materials needed for the seven-train expansion at Cheniere's Corpus Christi stage 3 were delivered, according to the firm in February. And 34 of 36 liquefaction trains at Venture Global's Plaquemines facility have been delivered on site, with the two remaining trains expected to arrive by the end of March, Venture global said last month.