U.S. LNG industry rattled by domestic shipping requirement

The Trump administration has issued a new rule aimed at requiring a portion of U.S. LNG exports to be made on U.S.-made tankers in the coming years, with the aim of cutting its dependence on Chinese-built ships. But the oil and gas industry is warning that the requirement is “not feasible” and poses risks to LNG exports.

The rule issued in late April would require 1 percent of LNG exports, by volume, to be done on U.S.-built and flagged ships by 2029. The problem is there are no LNG tankers built in the U.S. and no ability to build any in the near future.

The final rule, issued by the U.S. Trade Representative, is more flexible than the original proposal from February, which would have imposed immediate fees of $1.5 million for each port call made by Chinese-made ships to the U.S. Instead, the government allowed for a grace period until October 2025, when a $50 fee per net ton will begin.

For crude oil, that would impose a roughly “per-barrel service fee of ~$2-$3/bbl for Chinese-owned or operated oil tankers arriving at U.S. ports,” ClearView Energy Partners wrote in a note to clients on April 18^th.

“If additional port fee costs are applied to LNG vessels, Chinese vessels are then likely to be diverted away from US LNG projects, meaning that the Atlantic Basin could gradually have less shipping availability relative to that of Asia,” Rystad Energy said in a note on April 24th.

Trump’s trade war, which led to Chinese retaliatory tariffs on U.S. LNG, has all but ended the LNG trade between the two countries for now.

However, it is the requirement that 1 percent of LNG exports be done on U.S.-constructed ships by 2029 that is alarming the industry. The rule stipulates that the ships be “U.S.-built, U.S.-flagged, and U.S.-operated vessels.” That figure increases to 2 percent in 2031, and continues to rise incrementally until it reaches 15 percent by 2047.

The American Petroleum Institute said the rule is “not feasible” and threatens American LNG exports.

The requirement “is not possible to comply with and risks counteracting the significant progress the Trump Administration has made towards reducing uncertainty and unleashing U.S. LNG,” the American Petroleum Institute wrote in a letter addressed to the Secretaries of Energy and Interior. “Today, there are no large-scale LNG vessels that meet those criteria, and a lack of needed shipyard capacity, required infrastructure, skilled labor and seafarers are significant obstacles to building them here in the U.S.”

There are only two shipyards in the country that are long enough to have the ability to build LNG tankers, and even if they received orders, it would take four to five years to build. Because volumes of U.S. LNG are expected to double by the end of the decade, the 1 percent requirement would mean the industry would potentially need to introduce five U.S.-made tankers into the fleet, the API letter stated.

“Our understanding is that the current fleet of U.S.-flagged LNG carriers consists of a single ship, Crowley Maritime’s American Energy, which was built in France,” ClearView Energy Partners, a Washington D.C.-based consulting firm, said in a note to clients. That ship is used to service Puerto Rico.

“This dearth of qualifying capacity could present a significant hurdle to out-years requirements unless American shipyards ramp up quickly,” ClearView added.

However, the rule leaves some wiggle room for exceptions or flexibility. The rules can be delayed by several years if companies order new vessels. Also, the 1 percent requirement is industry-wide, not imposed on each terminal.

“[W]e would not be surprised to see pragmatic modifications to these requirements,” ClearView said.

The industry is also worried that the new rule sets a precedent for blocking U.S. LNG exports, a tool that could be used by a future administration that may not be friendly to the industry. The fine print of the rule says that the U.S. Trade Representative could “suspend” export licenses if the rule is not met.

The U.S. oil industry is not the only one concerned about such a scenario — so too are potential customers. In Europe, there are growing concerns over European dependence on U.S. LNG, given the unreliability of the American government. If U.S. domestic gas prices spike, it is possible that the Trump administration would intervene and curtail exports.

“While we cannot wholly rule out constraints on LNG exports under exigent circumstances (e.g., a significant domestic supply shock), it currently seems unlikely that this Administration would be inclined to do so on the basis of insufficient U.S.-built LNG tankers,” ClearView said.

“At risk of understatement, the fluid nature of U.S. trade policy complicates long-term predictions.”

(Writing by Nick Cunningham; editing by Sophie Davies)