(Montel) Asian spot LNG prices have fallen to a new historic low as Chinese importers attempt to suspend supply deals in an already saturated market owing to the disruptive effects of the country’s coronavirus outbreak.
S&P Global Platts assessed its Japan Korea marker at USD 3/MMbtu on Thursday, its lowest level since the company launched the regional spot LNG price reference in 2009 and half where it stood this time last year.
French energy giant Total has said it rejected a request from a Chinese customer to use force majeure as a reason to avoid commitments to accept gas under a long-term supply deal.
Total suggested some customers were seeking to replace their more expensive contracted volumes of LNG with cheaper spot supply.
China's state-owned CNOOC had requested use of the extraordinary clause on LNG contracts, citing fallout from the coronavirus outbreak, according to various media reports.
Unusual circumstances
“It is unusual for force majeure to be declared in circumstances like this,” said Nick Prowse, a London-based energy lawyer and partner at Norton Rose Fulbright.
The clause, which can free parties from liabilities in the case of extraordinary events beyond their control, was more typically applied at times of operational disruption, Prowse said.
US LNG importers invoked it in the immediate aftermath of the terrorist attacks of 11 September 2001 due to increased scrutiny of tankers entering ports.
“There has to be some sort of link to show that they cannot take the scheduled cargoes.”
Chinese importers able to demonstrate they were unable to receive and process cargoes, for example, due to restrictions on the normal movement of vessels or personnel would likely have firm grounds to claim force majeure, Prowse said.
“But if it is one step removed – a decrease in market demand, downstream industries not taking the regasified LNG – then some LNG sales contracts will specifically exclude that.”
Demand hit
Chinese attempts to halt the spread of the coronavirus – which has claimed 600 lives and climbed to 30,000 cases – have included extending Lunar New Year holidays in many industrial parts of the country.
This has hit gas demand especially hard in the world’s second-biggest LNG importer.
Around 60% of Chinese gas demand comes from power and industry, according to Wood Mackenzie, while three quarters of Chinese LNG imports arrive in provinces that had extended holidays until 9 February, according to Australia’s ANZ bank.
The timing could not be worse for LNG producers. They were already confronting a failure of demand to keep pace with the addition of a record 40m tonnes of new supply last year, equivalent to 13% of the global market.
“There were expectations that winter 2019/20 would help absorb the supply glut but it turned out to be warm both in Europe and Northeast Asia,” said Ricky Dengkayaphichith, LNG analyst at consultancy Facts Global Energy.
“Low heating demand has put key demand markets on track to exit winter with very high storage levels, fuelling bearishness in spot LNG prices.”
Swiss investment bank Credit Suisse saw supply continuing to outpace demand this year.
“LNG spot prices may only get worse as we progress into summer, raising the prospect of supply curtailment or cargo deferral at some LNG projects,” said the company’s head of oil and gas research in Australia, Saul Kavonic.
“We expect the LNG spot market could tighten from 2022-2025, especially if some of the new wave of under-construction projects experience delays.”
However, with a record volume of projects sanctioned for development globally last year, oversupply could return to the market from 2025, Kavonic added.
French energy giant Total has said it rejected a request from a Chinese customer to use force majeure as a reason to avoid commitments to accept gas under a long-term supply deal.
Total suggested some customers were seeking to replace their more expensive contracted volumes of LNG with cheaper spot supply.
China's state-owned CNOOC had requested use of the extraordinary clause on LNG contracts, citing fallout from the coronavirus outbreak, according to various media reports.
Unusual circumstances
“It is unusual for force majeure to be declared in circumstances like this,” said Nick Prowse, a London-based energy lawyer and partner at Norton Rose Fulbright.
The clause, which can free parties from liabilities in the case of extraordinary events beyond their control, was more typically applied at times of operational disruption, Prowse said.
US LNG importers invoked it in the immediate aftermath of the terrorist attacks of 11 September 2001 due to increased scrutiny of tankers entering ports.
“There has to be some sort of link to show that they cannot take the scheduled cargoes.”
Chinese importers able to demonstrate they were unable to receive and process cargoes, for example, due to restrictions on the normal movement of vessels or personnel would likely have firm grounds to claim force majeure, Prowse said.
“But if it is one step removed – a decrease in market demand, downstream industries not taking the regasified LNG – then some LNG sales contracts will specifically exclude that.”
Demand hit
Chinese attempts to halt the spread of the coronavirus – which has claimed 600 lives and climbed to 30,000 cases – have included extending Lunar New Year holidays in many industrial parts of the country.
This has hit gas demand especially hard in the world’s second-biggest LNG importer.
Around 60% of Chinese gas demand comes from power and industry, according to Wood Mackenzie, while three quarters of Chinese LNG imports arrive in provinces that had extended holidays until 9 February, according to Australia’s ANZ bank.
The timing could not be worse for LNG producers. They were already confronting a failure of demand to keep pace with the addition of a record 40m tonnes of new supply last year, equivalent to 13% of the global market.
“There were expectations that winter 2019/20 would help absorb the supply glut but it turned out to be warm both in Europe and Northeast Asia,” said Ricky Dengkayaphichith, LNG analyst at consultancy Facts Global Energy.
“Low heating demand has put key demand markets on track to exit winter with very high storage levels, fuelling bearishness in spot LNG prices.”
Swiss investment bank Credit Suisse saw supply continuing to outpace demand this year.
“LNG spot prices may only get worse as we progress into summer, raising the prospect of supply curtailment or cargo deferral at some LNG projects,” said the company’s head of oil and gas research in Australia, Saul Kavonic.
“We expect the LNG spot market could tighten from 2022-2025, especially if some of the new wave of under-construction projects experience delays.”
However, with a record volume of projects sanctioned for development globally last year, oversupply could return to the market from 2025, Kavonic added.
