Big Oil Warned Trump Team China Trade Deal Was Unrealistic

by Bloomberg | February 14, 2020

By Jennifer A. Dlouhy, Shawn Donnan and Nick Wadhams (Bloomberg) – Industry leaders privately warned the Trump administration that the U.S. will struggle to deliver the oil, gas and other energy products that China has committed to buy in a new trade deal, raising additional questions about one of the president’s signature economic achievements.

The “phase one” deal signed by President Donald Trump on Jan. 15 calls for China to purchase an additional $52.4 billion in liquefied natural gas, crude oil, refined products and coal over the next two years. To do that, China would have to import an additional 1 million barrels per day of crude oil, 500,000 barrels per day of refined products and 100 tankers full of liquefied natural gas, the American Petroleum Institute cautioned last month in a closed-door meeting with the Energy Department.

Those amounts would strain shipping infrastructure and production capacity and would require China to purchase more crude oil than the federal government has predicted the U.S. would add in new production by 2021, the oil industry lobbying group said.

“The United States’ ability to expand its exports of crude oil and other liquids would likely become a binding constraint,” API said in its briefing for the Energy Department. And “even if production is available, logistical challenges remain with marine shipping and the Panama Canal.”

The warnings were detailed in briefing materials seen by Bloomberg News and confirmed by two people familiar with the late January meeting who asked not to be identified describing a private discussion. The meeting was requested by the Energy Department as the agency sought to understand how the Chinese purchase commitments would affect the U.S. oil and gas industry after the trade pact was inked, the people said.

The presentation by an industry viewed as one of the biggest beneficiaries of Trump’s trade deal with China underscores questions about China’s commitment to buy at least $200 billion more in U.S. goods and services over the next two years — more than double the $187 billion the U.S. exported to the Asian nation in 2017. Doubts have already been raised about the ability of U.S. to rapidly ramp up production of soybeans and other agricultural goods to fulfill the Chinese purchase pledges.

“We appreciated the opportunity last month to brief the DOE about the challenges and opportunities that the phase one agreement presents,” API’s senior vice president of policy, economics and regulatory affairs, Frank Macchiarola, said in an emailed statement. “While market conditions suggest more clarity around particular issues is needed, we commend the administration for gathering information from stakeholders to ensure this agreement is implemented successfully.”

Spokespeople for the U.S. Trade Representative and the White House didn’t respond to requests for comments.

White House chief economic adviser Larry Kudlow struck an optimistic tone Thursday, noting that domestic oil producers can quickly increase production from dense shale formations.

“With modern fracking, you just turn that switch on — boom — and we’ve seen that time and time again,” Kudlow said. “China wants energy,” he added, and “we will meet their demands.”

Oil and gas industry representatives have broadly hailed the trade package, with the API in January proclaiming it “a step in the right direction for U.S. energy.” Other oil and gas leaders also have celebrated the Chinese purchase commitments, with Anne Bradbury, chief executive of the American Exploration and Production Council, saying the phase one deal “helps us plan and invest in critical infrastructure to expand access to global markets while supporting U.S. jobs and economic growth.”

Nevertheless, analysts have already warned that logistical and contractual constraints could make it hard for China to make good on its purchase commitments. For instance, a major increase in competing pipeline imports from Russia in the coming years will squeeze liquefied natural gas trade in China. And while there are at least five major U.S. facilities already liquefying natural gas for export — with others planned — those multibillion-dollar facilities take years to build and are often subject to long-term purchase contracts.

“The government struck a deal that would really strain our existing export infrastructure,” said Dan Eberhart, a Republican financier and chief executive of drilling services company Canary LLC. “Frankly, the oil supply is there, but the administration’s efforts to increase exports are slightly ahead of the pipeline and export terminals capacity.”

API offered a similarly sober assessment to the Energy Department, counseling that any ramp-up in Chinese purchases of U.S. crude oil could displace nearly one third of current exports, bid up prices and strain existing shipping capacity, especially over the next two years.

Coronavirus Outbreak

The briefing occurred before an industrial shutdown in China caused by the novel coronavirus outbreak that sent oil prices tumbling and led analysts to sharply cut forecasts for global demand this year.

The meeting was one of several the Energy Department had with industry representatives ahead of a planned trip to China with Commerce Secretary Wilbur Ross. An Energy Department official said similar discussions were held with a broad range of leaders in coal, LNG and trading in preparation for the trip.

A decline in expected oil demand globally and the coronavirus outbreak may mitigate energy industry concerns while also complicating China’s ability to comply with its purchase plans.

Virus Outbreak

A number of senior Trump administration officials have over the past week said that the virus outbreak will at the very least delay China’s ability to live up to the terms of the buying spree promised in the trade deal. Even then, China hasn’t notified the U.S. that it’s unable to meet its commitments, according to a U.S. agriculture department official Wednesday.

Analysts and markets were already skeptical over the deal and the $200 billion in additional purchases of everything from airplanes to crude oil and soybeans that is its centerpiece. Trump has himself said that his own advisers have counseled him that some of the commitments he sought from the Chinese were unrealistic and boasted of his own role in setting higher targets.

At the signing ceremony for the deal last month, Trump recounted how he had overruled his own advisers after they agreed to an additional $20 billion in purchases of farm products.

“So our people agreed to $20 [billion], and I said, ‘No, make it $50 billion. What difference does it make? Make it $50 billion,” Trump said. “They say, ‘Sir, our farmers can’t produce that much.’ I said, ‘I love our farmers. Let them tell me they can’t do it.’ And I said, ‘Tell them to go out and buy a larger tractor. Buy a little more land.”’(Updates with Kudlow comment in ninth paragraph)

–With assistance from Stephen Cunningham, Jasmine Ng and Jordan Fabian.