* China embroiled in festering trade dispute with United States
* Also wants to ensure gas supply for its ‘war on pollution’
* Chinese imports of U.S. LNG expected to surge -Morgan Stanley
* Beijing faces mounting pressure to secure, diversify gas supply
By Meng Meng and Chen Aizhu
BEIJING, July 5 (Reuters) - China’s omission of liquefied natural gas (LNG) from its vast list of U.S. products that face hefty import duties from Friday has preserved a potential weapon should the trade war with Washington deepen.
It also underscores Beijing’s desire to ensure supplies of gas as it pushes to switch millions of households and businesses away from using coal as a key part of its ‘war on pollution’.
China will on Friday impose tariffs on $34 billion of U.S. goods from pork to soybeans to cotton in retaliation for a similar move by Washington as trade relations sour between the world’s top two economies.
“If the (trade) war escalates, (I expect) the government will not hesitate to add LNG,” a state oil and gas company executive said, declining to be identified due to the sensitivity of the issue.
Although U.S. LNG supplies to China have so far been tiny in volume and value compared with the around $12 billion per year of U.S. crude that arrives in the country, analysts say those levels could be set to shoot up as Beijing forges ahead with its battle to clear its skies.
Morgan Stanley has estimated annual Chinese imports of U.S. LNG could rise to as much as $9 billion within two or three years, from $1 billion in 2017. The amount could be even larger if the United States resolves a logistics bottleneck.
That would go a long way to helping balance China’s trade surplus with the United States, a major bugbear of Washington’s in the trade dispute. But the strategy also hands Beijing another weapon in its arsenal if the spat deteriorates further.
China’s Commerce Ministry did not immediately respond to requests for comment.
However, some industry sources said the country would feel the impact of any increased tariffs on U.S. LNG, as there are a limited number of major alternative suppliers.
“If we impose tariffs on U.S. LNG, we pay a much higher opportunity cost,” Mei Xinyu, a researcher at a think tank affiliated with the Commerce Ministry told Reuters.
“It is easier for China to switch into other suppliers in the soybean market. Duties on soybeans hurt the U.S. more, but duties on energy products would hurt both sides.”
At a meeting between the government and China’s three oil and gas majors ahead of U.S. President’s visit to the country last September, the companies underlined that China would have limited alternative sources for LNG imports, an official from one of the firms told Reuters.
“The conclusion at that time was that U.S. oil is not competitive,” the official said. “In the gas market, we don’t have much choice, mainly Qatar, Australia and the U.S.”
And China is eager to avoid any repeat of last winter’s gas crunch, when plunging temperatures drove people to crank up their heating amid the moves to turn away from coal.
Domestic natural gas demand rose 17.6 percent in the first five months of 2018, way above government forecasts of an annual growth rate of 7 or 8 percent, data from National Development and Reform Commission showed.
“With domestic gas production restrained, we need to expand imports to meet the target of having natural gas account for a 10-percent share of the energy consumption basket,” said Wang Haohao, gas analyst with Zibo Longzhong Information Group.
“We need U.S. LNG out of energy security considerations,” she added.
Reporting by Meng Meng and Aizhu Chen Editing by Joseph Radford