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Highlights

More traders, term suppliers receive CNOOC force majeure notices

Suppliers pushback likely to trigger disputes

China gas utilities report 10%-40% demand drop, manpower shortages

Singapore — The impact of China's coronavirus outbreak on LNG market is expected to worsen in coming weeks as economic activity in key manufacturing hubs struggles to rebound, keeping a lid on natural gas demand and triggering more LNG trade flow disruptions.

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Travel restrictions were still preventing millions of workers from returning to work Monday and factories expected only partial production restarts, with some delaying a return to operations until late February or early March.

This has raised the specter of more Chinese LNG importers reneging on supply contracts, and suppliers expressing concerns about more cargo cancellations after state-run CNOOC, China's largest LNG importer, declared force majeure last week.

More suppliers including commodity trading houses like Trafigura and Middle East gas producers have received force majeure notifications from CNOOC, according to market sources; and with oil majors like Total and Shell pushing back, it has set the stage for disputes.

Trafigura and Shell declined to comment, and Qatargas did not respond to queries seeking comment.

LEGAL COMPLICATIONS

Legal experts said the ability of a Chinese buyer to seek force majeure protection depends on the situations covered in LNG contracts, and defining this in the current market was complicated as not all events trigger a force majeure.

"Most LNG SPAs and MSPAs have a non-exhaustive list of events, which provided they satisfy the general test, are capable of being Force Majeure. This may include items such as epidemics, but that is only the start of the issue," Daniel Reinbott, partner at law firm Ashurst, said.

Contracts also exclude certain events from being force majeure, such as the inability of a party to pay or a breach of law, or even changes in downstream markets and reduced gas demand on its own, he said.

This is interesting because last week Total said in a press conference that there was a strong temptation from some long-term customers to use force majeure to reject cargoes under long-term contracts but still buy spot cargoes at cheaper rates.

Earlier this month, the China Council for the Promotion of International Trade, which promotes foreign trade and investment, issued force majeure certificates to local companies to protect them from the commercial fallout of the coronavirus outbreak.

"A notice by an authority supporting the buyer's claim may not be sufficient by itself – it will depend on the facts and the provisions of the LNG SPA," Reinbott said.

He said the affected party would typically need to comply with provisions like taking reasonable measures to minimize the effects of force majeure, and even if the buyer is not entitled to force majeure it may have rights to divert cargoes to other markets or reduce offtake quantities.

"As many as 35 February cargoes could be subject to force majeure declarations with at least five already diverted as of Feb. 7," ship broker Poten & Partner estimated in a report late Friday.

A source with CNOOC confirmed that negotiations with suppliers were tough and another said suppliers may not accept CNOOC's force majeure declaration easily.

WORSENING DEMAND

While suppliers were concerned about other Chinese LNG buyers declaring force majeure, a Sinopec source said that the company was still evaluating the situation. An executive at gas buyer JOVO said if their LNG sales fall they would need to adjust their purchasing plan, but issuing a force majeure was unlikely for now.

CNOOC remains most affected due to the suspension of many factories and transport restrictions, and many domestic LNG terminals were running with high inventories due to the fall in gas demand. Multiple sources said CNOOC claimed severe manpower shortages at its terminals, which are likely to persist.

Confirmed cases of the coronavirus reached 37,251 in China with 812 deaths, according to the World Health Organization's latest situation report on February 9.

A source with city gas distributor Guangzhou Gas said only half of its employees were able to return to work Monday morning, and gas demand from its customers had fallen by around 40% in the past two weeks.

The cut was mainly from industrial and commercial sectors, which accounted for around 60% of Guangzhou Gas' total sales, and the company was considering to lower gas purchases from CNOOC and PetroChina, the executive said.

Guangzhou Gas normally sources regasified LNG from CNOOC's Dapeng LNG receiving terminal and pipeline gas from PetroChina's West-East line.

Guangzhou Gas and terminal operator and gas distributor Dongguan JOVO expect gas demand to recover gradually in coming months but said the pace was hard to predict.

An executive with power plant operator Guangdong Energy said that its gas demand in the past two weeks fell by less than 10%, in line with usual run rates for the Spring Festival.

Gas-fired power generation is estimated to account for 18% of Guangdong's total power generation, with around 70% from coal-fired power plants.

North Asian LNG prices slid to a new low of $2.95 Friday, breaching the $3/MMBtu threshold for the first time since Platts started publishing JKM assessments in February 2009.

Platts JKM plunges to all-time low