Chinese Firm Offers Force Majeure on Gas Imports! Threat To US LNG?

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  • US LNG might face minimal threat from PetroChina force majeure on gas imports.
  • Declaration to put further pressure on an already depressed market due to weaker than expected demand and low international prices.
  • Cheniere Energy Inc. has two long-term contracts with PetroChina for a combined 1.2 million tonnes per annum of LNG. 
  • Cheniere’s contracts are typically robust and able to accommodate flexibility.
  • The biggest U.S. LNG exporter said that it was notified of cancellations of two loadings scheduled for April.
  • Market seems moderately firmer for May and June than it was a couple weeks ago.

PetroChina Co. Ltd.’s declaration of suspending natural gas imports because of the coronavirus outbreak might not be a direct threat to the U.S. LNG suppliers, reports Platts.

Natural gas imports suspension

Due to mounting concerns over the epidemic, global gas markets are negatively hit. During this time, PetroChina Co. Ltd. has declared that it would suspend natural gas imports because of the coronavirus outbreak. But this declaration is unlikely to be a direct threat to the U.S. LNG suppliers.

Force majeure declaration

Declaring force majeure is an uncommon step that allows a company to not perform on contractual obligations because of circumstances the company cannot control instead of commercial considerations. 

The subject has been brought into greater focus because the trade flow is already facing restrictions due to the deepening crisis created by the outbreak. This declaration will put further pressure on an already depressed market due to weaker than expected demand and low international prices.

Declaration confirmed

Jason Feer, head of business intelligence at oil and gas ship broker Poten & Partners said the suppliers to PetroChina have confirmed the force majeure declaration. 

  • The declaration followed contested attempts in early February by China’s top exporter China National Offshore Oil Corp., or CNOOC, to suspend its deliveries of LNG.
  • Cheniere Energy Inc. has two long-term contracts with PetroChina for a combined 1.2 million tonnes per annum of LNG. 
  • Only a small portion is in effect, with shipments on the balance starting in 2023.

Cheniere’s contracts affected?

Cheniere declined to comment on whether PetroChina’s force majeure declaration applies to its contracts with the company.

Cheniere’s contracts are typically robust and able to accommodate flexibility. If a customer declared a force majeure, Cheniere would try to work with the customer. 

Notification for U.S. LNG exporter 

The biggest U.S. LNG exporter said that it was notified of cancellations of two loadings scheduled for April –

  • one from its Sabine Pass terminal in Louisiana, and 
  • the other from its terminal near Corpus Christi, Texas. 

Customers generally have until March 20 to notify it about any changes in their intentions for May.

Cheniere’s chief commercial officer, Anatol Feygin said it is too early to tell if there will be more cancellations.

Market moderately firm

Feygin said the second quarter for energy in general is a lower demand quarter than any other part of the year. 

“Right now the market is actually moderately firmer for May and June than it was a couple weeks ago.”

LNG from the U.S.

Feygin said some LNG on the margin may not be lifted from the U.S. this year, though the company does not expect that to develop into a long-term trend. 

  • Cheniere’s long-term contracts are take-or-pay, so the exporter would receive a fee whether cargoes are lifted or not. 
  • Declaration of force majeure events, however, could allow customers to avoid having to comply with contract terms.
  • The bulk of U.S. LNG producers’ active contracts with buyers call for free-on-board deliveries of LNG. 
  • Buyers in such an arrangement take on the ownership and the risk of an LNG cargo once it is loaded onto a ship and are free to take the cargo to any destination.

The narrow window

Executives said that the window for a force majeure would be narrow, relating to a technical issue with a specific incoming ship, for example.

  • LNG sellers take on more risk in delivered ex ship contracts. 
  • The seller in a delivered ex ship contract assumes the full cost and risk in delivering a cargo to its destination port. 
  • But supply tied to such contracts do not yet count for “a material amount of current LNG cargoes,” S&P Global Ratings said in a recent report.

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Source: Platts