Views on spot Western Australian cargoes diverge amid strike uncertainty

Prospective strike action by workers at Australia's three LNG plants -- Gorgon, Wheatstone and North West Shelf -- has caused uncertainty among market participants over trading of cargoes sourced from these projects in the spot market.

Members of Australia's Offshore Alliance Union have started voting to determine whether they will take protected industrial action (PIA) at Chevron's LNG facilities starting Aug.18. The results of the ballot for Chevron's downstream Wheatstone and Gorgon facilities are expected to be announced Aug. 25. As of now, there hasn't been any notice of PIA sent to Woodside Energy.

Following the vote, the unions will need to determine whether to pursue any form of action. Possible actions might encompass brief halts, activity restrictions, prohibiting loadings, or a complete work stoppage.

Views on risk management

Industry sources said spot traders were having doubts about purchasing cargoes from Australia due to concerns about any possible declaration of force majeure if industrial action takes place.

The uncertainty has convinced some of them to insert different clauses into bilateral spot contracts that could reduce the risk of non-delivery should cargoes be sourced from the three Australian projects.

Market sources have also raised the possibility of price discounts applied to spot trades involving cargoes originating from Australia, in order to account for the force majeure risk.

Industry participants have also put forward another viewpoint on trading of Australian spot cargoes from the affected projects. One trader said that in the bilateral market a seller of a spot cargo from Western Australia could either invoke the force majeure clause in the event of industrial action and not deliver the cargo, or substitute it with a cargo from another source -- thereby providing a certain degree of seller optionality.

According to multiple sources, over the course of the week both Chevron and Kuwait Foreign Petroleum Exploration Company had issued sell tenders for cargoes from Gorgon and Wheatstone, respectively, after the news of potential strike in Australia emerged. There was talk that two tenders had been awarded at discounts to other sources -- but specific deal prices could not be widely verified. Additionally, most of the spot trade liquidity comprised of Australian-sourced volumes, which makes it difficult to assess price differentials from such sources.

Nevertheless, a few market participants said it was unjustified to treat western Australia-sourced shipments differently from those of other projects.

"Since trade terms remain standard and Woodside and Chevron are actively working to prevent industrial action, Australian LNG cargoes should be treated on par with other cargoes in the physical market," another trader said.

According to other sources, as the market had recently seen more volumes coming from Western Australian projects, there could be more upside for cargoes for loading in September to October.

"This could be a sign that they are confident of delivering, but buyers remain skeptical of Australian producers' ability to deliver if a strike occurs as deals may go under force majeure," a trader said.

Other market sources also attributed robust spot supply as a key factor for buyers seeking discounts.

"Currently, due to balanced supplies in many countries, buyers in general are not in a hurry to procure; hence, it is reasonable for buyers to ask for discounts when procuring physical cargoes from Australia," an Asian importer said. "However, the discount should not be too steep." Players could also be keen on reselling October and November cargoes due to sufficient inventory levels, the importer said.

Cargo competition

Australia plays a crucial role in the global LNG trade. According to the 2023 World LNG Report by the International Gas Union, Australia maintained its position as the leading global LNG exporter in 2022. It exported 80.9 million mt, an increase from 79 million mt in 2021.

Any supply disruptions from Australia could affect 50-60 cargoes per month.

Other market participants indicated that buyers who wish to exclude Australian cargoes to mitigate delivery risks should compensate the seller with a premium as such bids limit sellers' flexibility in providing cargoes. Consequently, buyers should pay a premium due to the competition in demand if more buyers are willing to take non-Australian LNG cargo, they said.

However, in the Northeast Asian market, few end-users have said they had excluded Australian cargoes in their contracts.

"We are not excluding Australian cargoes in our contracts as sellers have the obligation to substitute with an alternative load port if there is no cargo supplied from Australia," a Japanese end-user said.

Other Japanese sources said they had not seen any buyers avoiding Australian cargoes and that the market remained muted with no expectation for a supply outage in Western Australia.

Chinese suppliers are well balanced and don't see much demand from second tiers seeking cargoes in the spot market, a Chinese buyer said.

"Chinese importers are less sensitive to price changes led by Australian strikes, while there is no disruption seen for the off-taking of cargoes from Western Australia," another Chinese importer said.

South Korea's KOMIPO was also heard to have awarded a cargo through a tender that closed Aug. 16 for mid-October delivery to prepare for early winter demand.