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PipeChina to bundle LNG terminal access with long-term NOC cargo purchase: sources

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PipeChina to bundle LNG terminal access with long-term NOC cargo purchase: sources

Highlights

Pre-condition deters gas companies from seeking terminal access

Bundled sales clause yet to be finalized

At least 17 gas companies sent terminal user agreements

Singapore — State-owned China Oil & Gas Piping Network Corp, also known as PipeChina, has put in place a pre-condition to shippers who intend to obtain third-party LNG terminal access, to bundle spot imports with cargoes from the three state-owned oil companies' historical long-term contracts, several sources from companies with knowledge of the matter told S&P Global Platts this week.

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The companies had applied for PipeChina's LNG terminal slots and were recently shortlisted, but said that their interest to obtain third party access would be dampened, if they were mandated to buy long-term cargoes from the national oil companies, at higher oil-linked prices, in addition to spot cargoes.

"We may not consider using PipeChina's terminal slots if it is compulsory to purchase the three NOCs' term contract LNG cargoes," a source with one of the shortlisted companies said, adding that the cost of contracted LNG is estimated to be around $8-$9/MMBtu based on a crude price of around $60-$65/b, with a slope of 13.5%.

This is much higher than spot LNG. JKM, the benchmark for spot LNG in Northeast Asia, was assessed at around $5.57/MMBtu on March 1, for April-delivery cargoes on a DES basis, Platts data showed.

PipeChina, China's largest energy infrastructure company, was created in 2020 under the country's largest gas market reform in decades, and designed to break the hold of NOCs over energy infrastructure. Its original intent was to liberalize China's natural gas market and allow more market participants to access LNG infrastructure facilities.

PipeChina could not be reached for comment.

PIPECHINA PROPOSAL

"There is a clause in the contract with PipeChina stating that terminal users should jointly bear the import cost of LNG term contracts with the three NOCs, which means terminal users will have to buy the three NOCs' long-term LNG contract cargoes," a source with a second shortlisted company confirmed.

The company has been sent a terminal user agreement by PipeChina, but the state entity has yet to release a detailed operating scheme, the source added.

"It seems that companies which want to utilize the PipeChina terminal slots will have to agree to that condition, and sign a separate LNG purchasing agreement with the three NOCs," a source with a third shortlisted company said.

The third source said there was a possibility for a "one-plus-one system" where a slot to purchase a spot LNG cargo is accompanied by a long-term cargo from the three NOCs, similar to CNOOC's prior system for its own LNG terminals before PipeChina was formed. He noted that shippers who want to use the slots they were awarded after April 30 must start receiving long-term LNG cargoes.

"But the TUA, or terminal user agreement, did not specify what penalties would be imposed if the terminal users don't sign purchasing agreements with the three NOCs. In any case, once the TUA is signed, the terminal operation fee will need to be paid to PipeChina," a source with a fourth shortlisted company noted.

SELECTION PROCESS

A total of 54 companies had been shortlisted by PipeChina for qualifying to access its terminals, Platts reported earlier. Multiple sources said that at least 17 companies have received PipeChina's TUA, among which three have confirmed that they have signed the agreement.

"Some companies, which have cheaper alternative resources, or have not enough end-user market, might give up signing the contract as it's not easy to digest the high import cost of the three NOCs' term contract cargoes," the fifth source with a company that has signed the TUA said.

The final bundling agreements have not been finalized, and there could be two more rounds of qualification, although the results are unlikely to be publicly announced, according to a source from a sixth shortlisted company and another from an NOC.

"A complicated grading system has been put in place. They look at a company's credibility, matched sale-purchase agreements, downstream operations, and conduct know your customer (KYC) and other due diligence matters," the sixth company's executive said.

PipeChina is also selecting applicants based on the shippers' own long-term LNG contracts, contribution to guaranteeing gas supply in 2020, history of LNG terminal use, and the ability and credit to buy LNG from the international market, sources said.

Some of the companies that have been awarded slots include Sinopec, Guangdong Energy, and China Gas. Other companies that have received TUAs include Zhenhua Oil, ENN Energy, Beijing Gas, Shenzhen Energy, Jovo, Huadian, Pacific Oil and Gas, Huahai Gas, China Resources, Dongguan Qingneng, Foshan Gas, and Xinxing Guoneng, according to company and market sources.