Chinese LNG importers consider invoking force majeure
Almaty. February 6. KazTAG - Chinese state-backed importers of liquefied natural gas are examining if they can provisionally halt contracts for the supercooled fuel, as the coronavirus outbreak depresses energy demand in the world’s second-largest economy, reports the Financial Times.
Two sources briefed on the discussions said the move could see the temporary cancellation of contracts — under a condition known as force majeure — by companies such as China National Offshore Oil Corporation, and possibly Sinopec and China National Petroleum Corporation. Gas demand has fallen rapidly after the extended Chinese new year holiday, as Beijing struggles to bring the coronavirus outbreak under control by shutting down cities and restricting travel.
The companies did not immediately respond to requests for comment outside normal business hours.
“China’s LNG market got off to a very weak start this year,” said an official at Huayou Zhonglan Energy Co, a LNG factory based in the southwestern city of Bazhong. It is not one of those considering force majeure. “Our future depends on how quickly the government puts the disease under control.”
The temporary cancellation of contracts would create new headaches for LNG suppliers, who are already grappling with record low prices in Asia following a mild winter and growing output from projects in the US and Australia.
Prices in Asia have fallen towards the $3 per million British thermal units (mmbtu) mark for the first time in history, down from more than $5/mmbtu mid-January, while prices are also weak in Europe and Latin America.
LNG and oil prices have been hit hard as flights have been halted, motorists have stayed off the roads and factories have shut for longer than anticipated. “This is terrible news for the global LNG market, which is already in a very depressed state,” said Jonathan Stern at the Oxford Institute for Energy Studies.
“If the spot price is further depressed, it causes all types of mayhem, especially for long-term buyers with the price linked to oil.”
Most buyers of LNG tend to purchase the fuel through long-term contracts pegged to oil prices, which have become more expensive than buying LNG on the spot market.
There are question marks, however, over whether Chinese LNG buyers will be able to trigger force majeure provisions, given they are often designed for more conventional problems such facility outages that might stop a buyer taking supplies.
But sellers may be willing to be flexible, people in the industry said, given China’s problems with the virus and the fact the country is set to become the biggest buyer of the fuel in the next few years.
“It’s not clear that just because you’ve got reduced demand you’ve got a case for force majeure — in some LNG agreements, changes in demand are specifically excluded as a reason,” said Frank Harris at consultancy Wood Mackenzie.
“But they may ask sellers to work with them and the sellers might be more willing than usual to be flexible given the buying power of the client.”
Analysts said that trying to estimate the extent of the energy demand fall in China was difficult, as the last similar outbreak — Sars in 2003 — came when the country’s economy was far smaller and its energy demand much lower.
But BP chief financial officer Brian Gilvary said on Tuesday that he believed the latest virus could slash oil demand growth globally by 40 per cent this year. The slowdown in economic activity due to coronavirus could take out 5-7 per cent of China’s LNG demand in February, according to S&P Global Platts. The supercooled fuel is less widely used in transportation than oil.
Oil prices entered a bear market on Monday, defined as having fallen 20 per cent from their recent peak, with Brent crude slipping below $55 a barrel.
Photo source: picture from an open source