Page 6 - NorthAmOil Week 06

NorthAmOil COMMENTARY NorthAmOil
Coronavirus adds to LNG market woes
The coronavirus outbreak in China is hitting the country’s energy demand hard, with CNOOC attempting to declare force majeure on some LNG deliveries
GLOBAL
WHAT:
CNOOC’s attempted force majeure declaration is the latest blow for the LNG market.
WHY:
LNG spot prices were already at record 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 difficult 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 flights cancelled, motorists staying off the roads and factories closed for longer than expected following the Lunar New Year holiday. These efforts 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. On February 6, the Platts Japan/Korea Marker (JKM) LNG benchmark fell to a record low of $3.0 per million British thermal units ($82.98 per 1,000 cubic metres), half the spot market rate in October 2019, when the heating season started. And the downward pressure looks set to continue, 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. The move followed a Chinese interna- tional trade promotion agency saying last week it would offer force majeure certificates to compa- nies 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 first 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 effective, the notice would need the backing of third-party official 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 often designed for more conventional problems such as facility outages. Meanwhile, changes in demand are specifically excluded as a cause to declare force majeure in certain LNG contracts. However, there were hopes that sellers would be willing to be flexible in the face of the epidemic, perhaps taking into account the fact that China still stands to become the world’s larg- est buyer of LNG by the mid-2020s.
But these hopes appear to have come to noth-
ing, at least initially. Bloomberg reported on Feb-
ruary 7 that two of CNOOC’s suppliers – Royal LNG spot prices Dutch Shell and Total – had rejected the force
majeure notices. Sources familiar with the mat-
ter were cited as saying the two European-based
companies did not accept the legal grounds for
the move, which would have freed CNOOC
from its contractual obligations to take the LNG
in question. mild Northern
The sources added that CNOOC was still likely to cancel delivery of the cargoes, but with the force majeure notices rejected, the suppliers were likely to seek compensation from the Chi- nese company.
Bloomberg separately reported that Pet- roChina, the country’s largest oil and gas firm, was forced to delay discharge timings for mul- tiple cargoes because it could not send enough workers to its Rudong, Dalian and Caofeid- ian LNG terminals to run them at full capac- ity. The company has reportedly not invoked force majeure because of the delays, suggesting that the move may yet be coming. However,
Hemisphere winter.
were already low thanks to an unusually
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