The Sanctioned Brown Bear and the Lively Panda
As Russian Gas Bloodies, the Prospects for US-China Energy Trade Remain Bright
Vladimir Putin’s increasingly ruthless invasion of Ukraine continues to shock and appall onlookers throughout the world.
So how should one respond to the Nuclear Brown Bear?
By feeding the Panda instead?
Government sanctions on Russian individuals and companies, business suspensions from major international corporations, as well as a host of other financial actions, comprise the brunt of global pushback against the invasion.
And on an even larger scale:
A shift away from dependence on Russian energy and a larger role for US energy will round out the global response over the long term.
For example, the European Union, which receives almost 40% of its gas and a quarter of its oil from Russia, has already recently committed to eliminating its dependence on Russia “well before 2030.”
But what about China?
It is true that the energy-hungry Middle Kingdom is currently positioning to secure a dependable supply of Russian gas going forward, possibly to take advantage of Russia’s now-lessened bargaining power and lock in a more favorable rate.
But the US is also strongly positioned to export its own energy to China.
To explain why this is the case:
Here are my key takeaways from this past week’s "U.S.-China Regional Dialogue Series: Forum on Innovation in Energy, the Environment and Sustainability."
Depending on where you get your numbers, the US and China account for almost 40 percent of global GDP, as well as a plurality of trade and investment. And the pair continues to outgrow the rest of the world as well.
Bottom line: Despite increased tensions in recent years on multiple fronts, US/China is by far the world’s most important bilateral relationship. And it’s shaping no sector more profoundly right now than energy.
The Forum was sponsored by the US-Asia Institute and global resort operator Sands (NYSE: LVS). Speakers featured 10 members of the US Congress, high ranking American and Chinese government officials including ambassadors, decision makers of top global financial institutions, energy trade groups, leading academics of both countries and high level executives of energy consuming and producing companies.
The primary focus was how the US and China are working together to address the challenges of ensuring clean and affordable energy. Here are my primary takeaways for energy investors.
First, energy is the rare policy area where the US and China are increasingly finding common ground, which makes consequential actions highly probable. Last November’s US/China Joint Declaration was by far the most important development from the Glasgow Climate Change Conference, or COP26. But cooperation on energy actually started percolating with former President Trump’s Phase One trade agreement, featuring a substantial commitment by China to purchase US LNG exports.
Despite substantial imports from Russian pipelines, China will once again be the world’s leading contributor to LNG import trade growth this year. The key driver of gas demand is still replacing onsite burning of coal by homes and businesses. But following up on COP26, the country has now stopped construction of new coal-fired power plants.
Accordingly, gas is expected to pick up substantial market share in electricity generation as well, despite massive investment planned for renewable energy and nuclear power. And gas conversions for China’s heavy industry, which relies on coal for 50 percent plus of energy, are also set to pick up steam.
China’s natural gas consumption overall has roughly tripled since 2011, rising from 5.9 percent of the country’s energy mix in 2015 to 8.4 percent in 2020. And J.P. Morgan estimates are gas’ share will reach 15 percent by 2030, meaning at least eight more years of upper single digit percentage demand growth.
As I hinted at earlier, last month, Russia’s Gazprom (trading suspended) announced it would build an even bigger pipeline to sell gas to China under a 30-year contract. That was before the Ukraine invasion shut off the company’s access to capital and collapsed its trading operations. And the project already faced meaningful challenges to its scheduled in-service date of 2025, including a projected 2,500-mile route through harsh terrain.
But even if the Gazprom pipeline does eventually enter service, there’s still plenty of room for massive expansion of US LNG imports to China. There is the challenge of constructing new export capacity, particularly with the 3-2 Democrat majority on the Federal Energy Regulatory Commission requiring new energy projects to prove they’re "needed."
But sating China’s thirst for US natural gas nonetheless has many powerful advocates. And even current demand levels are a huge driver of returns for companies that already operate facilities like Cheniere Energy Partners (NYSE: CQP), Energy Transfer Partners (NYSE: ET), Kinder Morgan Inc (NYSE: KMI) and Sempra Energy (NYSE: SRE).
Sempra has spun off its LNG efforts into a separate unit, Sempra Infrastructure, selling a minority interest to raise capital to accelerate development. To that end, construction of the ECA LNG Phase 1 project remains "on time and on budget" for startup in 2024. The company has a memorandum of understanding with Mexico’s primary energy agency to develop the Vista Pacifico LNG facility in Baja California. And it’s pushing ahead with expansion of its Cameron facility in Louisiana.
These projects should ensure Sempra wins a lion’s share of expected 5 to 10 percent annual US LNG export growth going forward, locking in customers to the kind of 20-year contracts preferred by China. Sempra shares are a buy at 150 or lower. Cheneire (50), Energy Transfer (15) and Kinder (22) are also good buys for anyone who doesn’t already own them.
Starve the Brown Bear, Feed the Panda
To your wealth!
Roger S. Conrad