Financial Review: Chinese ‘force majeure’ talk further chills LNG market

State-owned companies including China National Offshore Oil Corporation and possibly Sinopec and China National Petroleum Corporation are examining whether they could call “force majeure” on contracts, the Financial Times reported.

Analysts at Houston-based Tellurian noted that Chinese importers have started to divert cargoes to India as they seek to avoid taking such action amid soft demand due to the virus outbreak and a mild winter.

Credit Suisse analyst Saul Kavonic said that the discussion of force majeure seemed “a hypothetical for now” and noted it was unclear in what circumstances such clauses could be invoked. In any case, it would vary from contract to contract.

He also suggested China could threaten to pursue force majeure as a negotiating tactic amid “painful” conditions on prices, where some oil-linked contract prices were about three times spot prices, a situation now exacerbated by a sudden demand drop due to the virus.

The benchmark LNG spot price in northern Asia has halved since October, dropping to $US3.512 per million British thermal units this week, according to S&P Platts, the lowest since the firm started assessing the price in February 2009.

Business as usual

Origin Energy’s Australia Pacific LNG venture and Shell’s QCLNG venture, both in Queensland, have significant long-term contracts with Chinese buyers, as does the North West Shelf venture, although the low price of that contract makes it less of an issue, Credit Suisse said.

However, it is understood that neither APLNG nor QCLNG have been affected so far and are continuing with business as usual.

“At this stage, there have been no operational impacts to Australia Pacific LNG as a result of the coronavirus,” an Origin spokeswoman said.

“As this is an evolving situation, we are continuing to review the advice from the relevant authorities and are carrying out the necessary planning to ensure we can manage and mitigate any risks to the business that may arise.”

Origin advised in November that customers at APLNG had exercised their right to ratchet down the volumes they would buy over the following year. The so-called Downward Quantity Tolerance typically allows a buyer to reduce contracted purchases by up to 10 per cent.

Shell declined to comment.

Wood Mackenzie said it was “possible” that force majeure could be declared on some contracted cargoes as contracts “often include epidemics as a trigger and the government has reportedly offered companies force majeure certificates”.

The firm said LNG demand had “fallen off a cliff” since January and that buyers would be looking at all options.

“Force majeure could provide relief for Chinese buyers but should always be considered an option of last resort,” Wood Mackenzie said.

Meanwhile, Shell has reduced LNG exports from Australia in any case as a result of a forced shutdown of its new Prelude floating LNG project off the far north-western coast.

Work is under way to resume full operations after an electrical trip at the massive plant on February 2, a spokeswoman said. The numbers of workers on board have been reduced, with staff flown by helicopter to Broome, until the facility is back up and running.

The spokeswoman noted that the shutdown wasn’t related to a review of some safety management systems required by the National Offshore Petroleum Safety and Environmental Management Authority. The regulator issued a direction to Shell on January 22 for a review after three notifications of “dangerous occurrences” at the vessel in September, December and January.

Angela Macdonald-Smith writes on the resources industry with a focus on energy, including gas, oil, electricity and renewables. Connect with Angela on Twitter. Email Angela at [email protected]

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