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China's CNOOC declares force majeure on LNG contracts amid coronavirus outbreak

Highlights

Shell, Tangguh hit by CNOOC's force majeure: sources

Buyer has more than 20 mil mt/year in LNG SPAs

Other Chinese LNG importers mulling force majeure option

Platts JKM plunges to historic low of $3.15/MMBtu Wednesday

Singapore — China's state-owned CNOOC has declared force majeure on LNG contracts, a source close to company said Thursday, as the country's largest LNG importer tackles disruptions in downstream markets in the wake of the coronavirus outbreak.

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The coronavirus has sparked fears of a major economic slowdown in China, the world's second-largest LNG importer behind Japan, where quarantines and travel restrictions have caused a demand contraction.

So far, 25 countries have reported confirmed cases of the virus, 99% of them -- 24,363 cases -- in China, and the remaining 191 outside China, according to the World Health Organization Wednesday.

The force majeure by CNOOC further dims China's demand outlook and raises concerns about its impact on global trade flows and prices, with Platts JKM plunging to a historic low of $3.15/MMBtu Wednesday.

Multiple industry sources said force majeure had impacted volumes from Shell, which has a contract with CNOOC for 5 million mt/year, and the Tangguh LNG project.

Shell declined to comment while Tangguh LNG's operator BP and CNOOC could not be immediately reached for comments.

Other suppliers of CNOOC's contracts include Australia's North West Shelf and Queensland Curtis LNG, Malaysia's Bintulu, and Qatargas. Total and Petronas also have portfolio contracts with the buyer. CNOOC has more than 20 million mt/year in FOB and DES sales and purchase agreements.

"Woodside is closely monitoring for potential impacts on the market,” said a spokesperson with the Australian producer and operator of the NWS LNG facility Thursday.

OTHERS TO FOLLOW SUIT?

CNOOC's force majeure declaration could have a knock-on effect on the market, with other Chinese LNG importers also considering similar options, trading sources said.

"Now the problem is that we cannot receive cargoes, even if they are cheap,” a Chinese end-user added.

CNOOC's move follows Beijing's decision earlier this week to offer force majeure certificates to domestic companies if they are unable to fulfill their international contractual obligations due to the coronavirus outbreak, but the protection these certificates offer would depend on the specific contract and circumstances.

The notices may only pertain to upcoming deliveries at specific terminals, according to one LNG supplier with an existing contract with CNOOC, who has not yet received a force majeure notice. Deferment talks of February cargoes are ongoing, he added.

Another LNG supplier also noted that force majeure notices carry varying durations: about a week for spot or short-term contracts, compared to a month or longer for volumes signed under long-term SPAs.

With their application for force majeure certificates, Chinese companies would need to provide proof of delivery delays or cancellations, sales contracts or agreements, as well as customs declarations, the China Council for the Promotion of International Trade said in a statement January 30.

Whether a party can rely on such certificates to declare force majeure will depend on the facts and the wording of each contract, law firm Clyde & Co said in an advisory this week.

"The crux will lie in whether such businesses have been truly and seriously affected by the virus outbreak and have had to face the possibility of halting their business operations,” it added.

CARGO DELAYS, DIVERSIONS

"The most likely scenario is that the spot contracts will be affected first and that the volume of purchases under long-term contracts will drop to the minimum acceptable levels according to the take-or-pay conditions,” analysts at ATON said in a research note released Thursday.

Meanwhile, cargo delays and diversions have become more common over the past week, as Chinese end-users struggled to cope with rising inventories amid subdued outlook on downstream demand following the virus outbreak.

The carrier Tangguh Foja, which was heading from Tangguh LNG to the Rudong terminal in Jiangsu, was later redirected to Singapore where it is expected to arrive Thursday, according to Platts trade-flow software cFlow.

A second vessel, the Al Kharsaah, was diverted to the Tianjin terminal in China from its initial destination at the Zhejiang terminal, according to market sources, but the diversion could not be confirmed with the cargo owners.

Market sources hinted at other diversions of cargoes originally meant for CNOOC to alternative buyers in Singapore and South Korea, but further details were not available.