Malaysia's Petronas seeks to cut winter LNG deliveries from Bintulu LNG by 15-20 cargoes

Malaysia's national oil company Petronas has sought to cancel or defer 15-20 more LNG cargoes contracted mainly with Japanese customers and scheduled for delivery during the Northern Hemisphere winter, multiple sources with direct knowledge of the matter told S&P Global Platts.

Over half a dozen LNG importers, including power and gas utilities, confirmed they had received notifications from Petronas formalizing its intent to exercise downward quantity tolerance, or DQT, on cargoes to be delivered from November onward from two plants -- MLNG Dua and Satu at the nine-train Bintulu LNG complex.

Petronas did not respond to queries.

The bulk of the LNG cargoes were for December to March delivery, the market sources said. DQT is the right exercised by a supplier to reduce contracted volumes by a fixed percentage, which usually is around 10%, in the event of unusual circumstances.

Suppliers typically try to manage minor disruptions through optimizing supply within their own portfolios, or other business arrangements like agreeing to increase supply at a later date. Triggering contract clauses are only done as a last resort to avoid legal disputes.

The latest notifications impact LNG supply during winter and have stoked concerns among Japanese utilities and end-users that have largely refrained from procuring spot cargoes after prices spiked to record levels.

The S&P Global Platts JKM for December was assessed at $29.265/MMBtu Nov. 11.

"We were aware of the clause but didn't expect it will be used on us. Petronas seems to be exercising all the DQT rights they have," a Japanese power utility that received a DQT request said, adding that it is now weighing alternatives like coal and fuel oil to minimize input costs as spot LNG prices are "too high."

One of Japan's largest gas utilities that is subject to DQTs on more than one offtake contracts with Petronas said it may look at jointly procuring replacement cargoes with non-Japanese importers.

"We will have to consider double discharge with another utility to avoid purchasing a full-sized cargo at high spot prices," a source with the gas utility said.

"It seems uncharacteristic for Petronas to be unwilling to negotiate on DQT with end-users, so they could be pressured by the government," the source added.

Wider impact

Some gas utilities with a higher exposure to Bintulu LNG's volumes but with a smaller operating footprint are feeling the pinch from the reduced Malaysian LNG outflows.

"A drop of one cargo for us has a big impact so we will have to adjust our long-term cargo delivery for the remaining fiscal year [up to March 2022] and request earlier delivery for annual delivery programs [from] April onward," one of Japan's smaller gas utilities said. The person said downstream JLC sales would not be able to match spot LNG cargos even if they were priced in the mid-$20/MMBtu.

JLC, or Japan LNG Customs arrival, is an average price of all LNG including spot and term cargoes arriving in Japan.

The bulk of Malaysia's LNG cargoes are exported from the Bintulu LNG complex comprising three trains each at MLNG and MLNG Dua, two trains at MLNG Tiga, and a ninth train operated by Petronas LNG 9.

Bintulu LNG boasts nearly 30 million mt/year of capacity and is rated as the largest facility of its kind at a singular location.

Petronas had started warning offtakers of possible cargo deferrals as early as August due to upstream issues, including mercury contamination at the Mubadala Petroleum-operated Pegaga project off Sarawak, designed to mainly supply MLNG Tiga.

"Pegaga field will be one of the key gas suppliers to Malaysia's total gas supply to the Petronas LNG Complex in Bintulu, Sarawak. Mubadala Petroleum has done all the necessary mitigation and actions to manage the mercury," a Mubadala spokesperson said in response to queries about cargo delays.