Scott DiSavino and Jessica Jaganathan by Chen Aizhu

SINGAPORE/NEW YORK – Major Chinese energy firms are currently in advance talks with U.S. importers to ensure long-term liquefied gas (LNG). Rising fuel prices and national power shortages have raised concerns over the country’s fuel security.

According to Reuters, at least five Chinese companies, including the state-owned Sinopec Corp (NYSE:) Corp, China National Offshore Oil Company(NYSE:)) as well as local government-backed energy distributors such Zhejiang Energy (NYSE,:) are currently in talks with U.S. exporters Cheniere Energy (NYSE,:) and Venture Global.

These talks could result in deals valued at tens to billions of dollars, which would cause a rise in LNG imports from China. Gas trade was briefly halted at the peak of Sino-U.S. tariff war 2019.

The talks began with U.S. supplier early in this year. However, they have been accelerated in recent months because of one the largest power-generating and heating fuel crises in decades. Fears of winter power shortages have been raised by the fact that natural gas prices in Asia rose more than fivefold in this year.

The supply gap for winter was a problem faced by companies and prices were on the rise. According to a Beijing-based industry source, talks have really picked up after spot prices reached $15/mmbtu in August.

A Beijing source also stated that buyers regretted not signing enough long-term supply contracts after experiencing recent market volatility.

According to sources, new deals are expected in the next few months after Cheniere was signed a 13-year contract with ENN Natural Gas Co by Cheniere’s ex-LNG chief and China’s largest buyer CNOOC.

This was the U.S.’s first significant LNG agreement with China since 2018.

China will be the largest LNG buyer in the world, surpassing Japan with these new purchases.

The first Beijing-based trader stated that companies, as state-owned enterprises are under great pressure to maintain security of supply. However, the price trend of recent years has profoundly changed the perception of long-term supplies.

While people may have seen the spot market as the mainstay of their business, they now realize that longer-term cargoes can be their backbone.

GAS FROM THE U.S. CHEAPER

As the negotiations are confidential, sources were not able to provide names.

Sinopec did not comment. CNOOC or Zhejiang Energy declined to comment immediately.

Venture Global has declined to comment. Cheniere has not yet responded to my request for comment.

“We anticipate more deals being signed by year-end.” This is mainly due to the global energy crunch, and the prices we see now… U.S. stocks now stand out for attractive,” stated a third Beijing source who was briefed about the talks.

U.S. cargoes are much more affordable than those from Australia or Qatar.

According to traders, a deal of $2.50 plus 115% Henry Hub futures would cost roughly $9-10 per million British thermal units, or mmBtu, on a delivery basis to Northeast Asia. The average shipping costs for U.S.-China routes are $2 per mmBtu.

Jason Feer, global head of business intelligence with consultancy Poten & Partners said Chinese companies are heavily exposed to Brent-related pricing for LNG and the U.S. purchases give some diversity to the pricing.

Asian spot gas prices have risen to a record $30/mmBtu. LONG-term LNG contracts linked to oil prices cost between $10-11 per millimeter. However, both calculations are dependent on liquefaction costs and premiums as well as the assumption of future oil and gas prices.

Chinese buyers seek out both short-term and long-term supplies to meet winter demand. China sees gas as a bridge fuel, before it reaches its 2060 goal of being carbon neutral. The steady growth in demand through 2035 is expected.

Sources said it’s difficult to determine the total volume of deals under discussion. However, Sinopec could have 4 million tonnes per year as its spot market exposure is greater than domestic competitors PetroChina or CNOOC.

According to traders, Sinopec has reached an agreement with at least 3-4 companies to purchase 1,000,000 tonnes per year starting in 2023. It is also looking to acquire U.S. volumes to fulfill the requirements.

U.S. supply options were also attractive due to delays in LNG exports from Canada (in which PetroChina has a stake) and Mozambique (where both PetroChina & CNOOC have invested), sources said.

North American LNG exporters have increased their capacities in response to increasing demand in key Asian economies.

Cheniere, America’s largest exporter, stated in September that it will announce “a variety of transactions” to support the Corpus Stage 3 expansion.

Venture Global has been developing or building over 50,000,000 tonnes of LNG production capacity (MTPA), in Louisiana. This includes the Calcasieu 10-MTPA, which will cost approximately $4.5 billion, and begin producing LNG in testing mode in 2021.

However, there were some cautious buyers.

There is much hype on the market, and no one knows how long this supply shortage will last. A separate Chinese importer stated that companies who don’t have new demand within the next year are better off waiting.”