Page 4 - GLNG Week 05

GLNG COMMENTARY GLNG
Coronavirus adds to LNG market woes
The coronavirus outbreak in China is hitting
the country’s energy demand hard, with CNOOC declaring force majeure on some LNG deliveries
PERFORMANCE
WHAT:
CNOOC’s force major declaration is the latest blow for the LNG market.
WHY:
LNG spot prices were already at new lows before Chinese demand started falling.
WHAT NEXT:
US LNG exporters could be facing cancelled cargoes, forcing them to cut output.
THE coronavirus outbreak in China is making waves in global energy markets as it hits the Asian country’s energy demand. Since hav- ing emerged in December 2019, the virus is exacerbating already di cult conditions in the global oil and LNG markets, which have been characterised by oversupply putting downward pressure on prices. In response to the outbreak, China has effectively shut down parts of the country, with ights cancelled, motorists staying o the roads and factories closed for longer than expected following the Lunar New Year holiday. ese e orts by Beijing to contain the virus are now reverberating across the LNG market.
LNG spot prices were already low thanks to an unusually mild Northern Hemisphere winter, coupled with new liquefaction capacity contin- uing to come online in the US and elsewhere. At the start of this week, the Platts Japan/Korea Marker (JKM) LNG benchmark fell to a record low of $3.512 per million British thermal units ($97.14 per 1,000 cubic metres), half the spot market rate in October 2019, when the heating season started. And the downward pressure has continued, with India’s Reliance Industries Ltd (RIL) purchasing an LNG cargo via tender on February 5 at $2.80 per mmBtu ($77.45) and Reuters reporting two bids being placed for car- goes at similar prices.
Force majeure
On February 6, China National Offshore Oil Corp. (CNOOC), the country’s largest LNG importer, was reported to have declared force majeure on prompt deliveries from at least three suppliers. e move follows a Chinese interna- tional trade promotion agency saying last week it would o er force majeure certi cates to com- panies struggling with the coronavirus’ impact on their business to give to overseas partners. It is perhaps the starkest illustration of the impact the coronavirus is having on Chinese LNG demand. It is also among the rst known cases of the legal clause being invoked in commodity contracts as a result of the epidemic.
According to a Reuters source familiar with the matter, CNOOC’s force majeure notice
covers LNG purchased during February and March. In a separate report, Reuters cited a source who works for one of CNOOC’s LNG suppliers, and said his company had received a potential notice of force majeure last week. However, according to the source, his company’s legal department had found that, to be legally e ective, the notice would need the backing of third-party o cial documents from local gov- ernments declaring a full shutdown situation at LNG receiving terminals.
Indeed, whether or not Chinese LNG buy- ers would be able to trigger force majeure was a matter of some debate over the past few days, as these are o en designed for more conventional problems such as facility outages. Meanwhile, changes in demand are speci cally excluded as a cause to declare force majeure in certain LNG contracts. However, sellers may be willing to be exible in the face of the epidemic, perhaps tak- ing into account the fact that China still stands to become the world’s largest buyer of LNG by the mid-2020s.
Bloomberg reported further details from sources who have not been identi ed because the matter is con dential. According to these sources, CNOOC sent force majeure notices to suppliers such as Royal Dutch Shell and Total. However, Bloomberg added that Total’s CEO said he had not received the force majeure notice, and as of press time these details remained uncon rmed.
If CNOOC’s force majeure declaration is found to be legally enforceable, other major Chi- nese buyers are likely to follow in its footsteps. Bloomberg also reported that PetroChina, the country’s largest oil and gas firm, was forced to delay discharge timings for multiple cargoes because it could not send enough workers to its Rudong, Dalian and Caofeidian LNG terminals to run them at full capacity. e company has reportedly not invoked force majeure because of the delays, suggesting that the move may yet be coming.
Meanwhile, an LNG tanker en route to China from Indonesia has been diverted, accord- ing to data intelligence firm Kpler and two
Whether or not Chinese LNG buyers would be able to trigger force majeure was a matter of some debate over the past few days.
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w w w . N E W S B A S E . c o m Week 05
06•February•2020