A phase 1 breakthrough trade deal has arrived on our doorstep...

A phase 1 breakthrough trade deal has arrived on our doorstep after 18 months of hard fought negotiations. Although the pact has not been formally signed off on by the Chinese and US Governments - a legal review currently being carried out with Beijing emphasising the text needed to be legally vetted and translated into Chinese - the signing ceremony is expected in the first week of January. Once inked, the deal will take effect roughly 30 days later.

China has committed to buying an extra $200B in US agriculture, energy and manufactured goods over the next 2 years. 25% tax on $250B worth of Chinese imported goods remains in place while the US will halve it’s 15% tariffs on the remaining $120B. China has not agreed to specific tariff reductions on LNG just yet. However, the Chinese Finance Ministry just announced on Monday that the country will cut its tariffs on Jan 1, to lower than the most-favoured-nation (standard) tariffs, on 859 products! The tariff changes were made to " increase imports of products facing a relative domestic shortage, or foreign specialty goods for everyday consumption," the ministry said in a statement on its website.

To give further clarification on the 25% tariff on LNG, this has always been a political issue, not a financial issue! Most Chinese buyers are state owned, the tariffs are collected by the state, so the state pays the state and consequently no impact! Even for private importers, the state could simply subsidise them if they so choose!

I believe the global market is on the verge of running hot in 2020, with competition to secure offtake intensifying with the looming supply shortage expected in 2025. In 2018, 40mt worth of LNG was contracted on a medium/ long term basis... there’s no reason why this quota can’t be matched or blown past with global trade flowing freely again in the new year!

Will share a positive development in relation to our MOU with DeltaOE, who are awaiting government approval for their Bac Lieu project. Prime Minister Phuc of Vietnam has agreed to include the Bac Lieu plant in PDP7 (Power Development Plan) within 2019 during his final remarks (on Nov 8) at the National Assembly’s Oversight Hearing with the Government Administration. Energy was a major topic of debate, in particular the Bac Lieu plant’s delayed inclusion in PDP7 by MOIT (Ministry Of Industry Trade). Given this was in front of the Cabinet, the National Assembly, most of the Politburo members and of most importance, the Party Secretary General Cum President of Vietnam, whilst being publicly televised, DeltaOE is confident it will be included in PDP7! The 8th session of the 14th National Assembly opened in Han Noi on the 21st Of Oct, ending on Nov 27.

On Dec 4 2019, the MOIT released a statement supporting inclusion of a 3200MW LNG fired power plant in Bac Lieu as part of the PDP7. However, it expressed concerns that investor, DeltaOE has proposed a selling price to low at US 7 cents per kWh. This is lower than the average electricity production price in Vietnam.

In the South, even coal-fired electricity is priced at 7.8 cents per kWh, the ministry confirmed, adding a gas-fired project could typically charge 8.38 cents per kWh.

Although the 7 cent price tag would benefit Vietnam, the ministry is concerned DeltaOE won’t be able to honour its commitment in the long run.

The plant’s location holds an additional geographical disadvantage; a fairway is needed as the plant is 355kms from the LNG terminal.

The Southwestern region of the country already boasts many thermal and wind power projects, which means an additional investment of $285M in a 355km transmission line is needed to ensure load.

“ These factors could increase investment in the project and therefore the 7 cent price tag may increase. If the investor cannot keep its commitment and later raises its price the retail electricity price would have to increase also “, the ministry said.

GV made reference at the last AGM to, “ the MOIT is getting pressured from the Prime Minister & National Assembly to sign the amendment for PDP7 to convert the current coal-fired Bac Lieu plant to natural gas “. MOIT, Tran Tuan Anh, said on Nov 7 the ministry is awaiting “ final approval from the government “. Prime Minister Phuc is strongly pro LNG as the primary energy source of choice for Vietnam’s future so if that’s the case, Bac Lieu should be in the bank along with our 2mt SPA!

Following my consistent, common theme in my research reports, highlighting future LNG demand trends, I’ll share this interesting graph provided by Cheniere Energy comparing global trade outlooks from 8 different sources - majors, energy consultants, research/intelligence specialists (Wood Mackenzie, IHS Markit, FGE, Poten&Partners, Bernstein, Cedigaz, BP, Total). By 2030, projections vary from 440mt to 580mt while 6 out of the 8 are saying import volume will hit a minimum 450mt by 2025/26’, with 4 of those 6 almost identical in forecasting 480mt by 2026. Global energy trade was 314mt in 2018.



What’s not included in these figures, which will become a significant new source of demand for LNG... marine bunkering. Starting Jan 1 2020, the International Maritime Organisation will require marine fuel oil used to power ships outside certain emission control areas contain no more than 0.5% mass by mass (m/m) Sulfur capacity. The so-called IMO 2020 rule is expected to promote greater adoption of LNG as a shipping fuel, with ship owners increasingly converting their vessels to run on LNG rather than heavy fuel oil.

The cost of LNG as a transport fuel is generally lower than that of oil based products (+ offering 24% more energy output per tonne than HFO), though the capital cost of the new vessel may be higher. This financial trade off means that LNG will be most attractive in high utilisation sectors, especially suitable for long haul & regular transit, that will achieve early pay back.

LNG bunkers are scaling up to meet demand from the big 3 shipping sectors... containers, dry bulk carriers, tankers. DNV GL (standards agency for ships & offshore structures) statistics reveal that as of June 2019, there were more LNG powered vessels under construction than the entire existing fleet currently in operation, 184 vs 176 respectively.

In Nov 2017, France’s CMA CGA announced their decision to order a series of 9 23,000 TEU containerships (world’s largest) plus 5 slightly smaller ones (15,000 TEU) the world’s first ever maritime shipping company to be powered by LNG! The world’s largest LNG powered container ship, Jacques SAADE, debuted in Shanghai on 25 Sept 19’, owned by CMA CGA. Total will supply 0.5mtpa for the 9 ships.

One glamorous but more niche sector of shipping that’s gaining momentum is LNG powered cruise liner fleets. As of July 2019, 30 LNG fuelled cruise liners were under construction. The owner of P&O cruises and Aida cruises, Carnival, has 11 on order, set for delivery between this year and 2028. 8 of these are in the company’s largest XL Class which can hold around 3,600 m3 of LNG. In April, Carnival took delivery of the 20 deck Aidanova, becoming the world’s first cruise ship to bunker LNG in the Port Of Barcelona! Disney has 3 ships on order, Royal Caribbean 3, TUI 2, Hurtigruten 6, Norwegian Yacht Voyages 4, Ponant 1

Wood Mackenzie forecasts this new market will drive a 23% annual growth in LNG demand for marine bunkering, reaching 22mt per annum (up from 2.5mt today) by 2030.

It’s going to be a very intriguing first half of 2020...

- US listing.
- Will DeltaOE MOU be converted into a SPA?
- With the trade war truce struck, global markets should respond in kind... buyers jumping off the fence, diving freely into long term contracts once more.
- Of most importance, what dollar amount will the Chinese commit to in this “giant” trade deal Trump has been banging on about. His administrations hardline approach to negotiating brought China to its knees which is going to result in a strong outcome across all sectors, agriculture/farming, energy, manufactured goods and I feel in particular, a big boon for LNG!

Will take a wild stab that China might agree to purchase $10- $12b (8-10mt per annum) over next 2yrs, calculating at an average buying price of $600 per tonne (from the variety of US projects). Recalling my last post, I made known China currently has 50mt worth of LNG tied up over long term contracts... 51.4mt under construction equating to 43.69mt (with terminal utilisation rate 85%) of uncontracted volume the country is looking to contract.

In July this year, the IEA (International Energy Agency) projected China’s LNG imports to surge to over 100BCM (74mt) by 2024. That is going to happen next year as evidenced from my numbers above & backed up by this Forbes account on Nov 1 19’, see “ China soaring past Japan in liquified natural gas imports “.

Here’s a chart produced by Oxford Energy that details Asian LNG imports, “ 2018 Actuals and Future Trends “

Low Case Volume Scenario in MT:

2018 2025 2030

Japan 111.0 90.5 77.0
Sth Korea 57.7 58.8 61
Taiwan 22.9 26.3 29
China 69.1 115.9 132.4
India 29.6 36.3 41.9
Indonesia 3.8 11 14.2
Malaysia 1.9 4.6 8.3
Thailand 5.6 15.2 22.5
Singapore 2.4. 11.2 17.8
Pakistan 9.2 16.4 21.6
Bangladesh .8 8.5 13.9
Vietnam - 4.7 8.3
Phillipines - .8 1.7

Total 314 400.1 449.7

So if China is needing 115mt by 2025 and has 50mt contracted at this moment, I’m sure it’s possible for the US to capture at least one 3rd of the approx 65mt required over the next couple of years.

For new investors or long termers thinking about cashing in their chips at a loss, as it stands today I feel LNG LTD is still a solid, long investment with potential to see an explosive ROI over the next 5-10yrs despite the difficulties/ headwinds the company has faced in signing up offtake to date.

If you wanted to hedge your bets I would also jump on the Tellurian band wagon with world class leadership in Charif Souki, the pioneer of exporting LNG, and CEO Meg Gentle (one smart, switched on woman).

Our partnership with IDG, who has strong ties to Foxconn will prove invaluable in successfully cracking the Chinese market! And as holders, with these very optimistic developments taking shape on several fronts, I truly sense our moment has finally come knocking!

Overall Im bullish about the natural gas sector over the next 5yrs!

Merry Christmas!

JK.