China demands cheaper LNG deal from Origin Energy

Sinopec is the latest in a wave of Asian buyers that have been looking to renegotiate their long-term LNG contracts to reflect the new pricing environment.

Sinopec, which holds a 25 per cent stake in APLNG, has issued a price review notice to the joint venture group – its second since a 20-year offtake agreement commenced with first production in 2016.

Origin Energy’s Chinese partner, and the major customer of its Australia Pacific LNG joint venture on Australia’s east coast, is seeking a price cut under its long-term supply contract, amid a slide in global prices that’s expected to continue as a wave of new development projects comes on stream over the coming years.

Sinopec, which holds a 25 per cent stake in APLNG, has issued a price review notice to the joint venture group – its second since a 20-year offtake agreement commenced with first production in 2016.

Any potential change to the contract price would take effect from January 1 next year.

Sinopec is the latest in a wave of Asian buyers that have been looking to renegotiate their long-term LNG contracts to reflect the new pricing environment.

Global investment in new liquefaction plants is expected to create an oversupply of LNG in the coming years, and when combined with heightened competition between other exporting nations including Qatar and the US, the downward pressure on prices is expected to continue towards the end of the decade.

Under the APLNG supply agreement, Sinopec purchases 7.6 million tonnes annually from the project, which sources natural gas from fields in Queensland’s Bowen and Surat basins, and exports from a 9 million tonne LNG production facility on Curtis Island near Gladstone.

According to Origin, Sinopec’s last price review in 2020 did not result in any changes to the contracted price.

However, MST Marquee senior energy analyst Saul Kavonic said the rate of indexation of LNG contracts to oil prices had eased since the APLNG deal was struck in 2011, meaning it was relatively expensive when compared to more recent supply agreements.

“Buyers will have been waiting (for the price review window),” he said.

“This is the first major price review for APLNG – the one a few years ago was more restrictive, so this review could result in a material change. It all depends on the clause limitations.”

Under the APLNG supply agreement, Sinopec purchases 7.6 million tonnes annually from the project. Picture: Reuters

In its latest annual report, Origin stated that either party to the supply agreement was able to call for a periodic review during the December quarter.

Sinopec’s request was confirmed in a statement from Origin to the Australian Securities Exchange on Friday.

“Origin Energy confirms that Australia Pacific LNG, in which Origin owns a 27.5 per cent interest, has received a price review notice from Sinopec in respect of its long-term LNG supply contract with Australia Pacific LNG,” it said.

“The contract requires the parties to use reasonable endeavours to agree on any changes required to have a contract price competitive with the prevailing market price for comparable long term LNG contracts.

“In the absence of agreement, either party may refer the matter to an expert determination process for decision.”

According to Origin’s latest full-year results, APLNG production increased by 3 per cent in the year to June, but cash distributions received from the project slipped 22 per cent to $1.38bn, due to lower realised prices of $17.14 a gigajoule, down from $20.01 in the previous year.

The falling price hit Australia’s LNG export revenue, which slumped to $69.5bn last financial year, according to consultancy EnergyQuest, down 25 per cent from a record $92.2bn in the previous year, which was affected by a price spike fuelled by the war in Ukraine.

An expected wave of new global LNG supplies is expected to put further pressure on prices over the next three to four years.

APLNG, one of Australia’s largest LNG exporters, is a joint venture between Origin, Sinopec and US oil and gas giant ConocoPhillips, which holds a 47.5 per cent stake.

It signed up Sinopec as a major offtake customer in 2011, in a multibillion-dollar deal that was the single biggest LNG sales agreement in Australia at the time.

That was followed later that year with a 20-year, 1 million tonne offtake deal with Japan’s Kansai Electric.

Confirmation of the price review came a day after Origin abandoned its hydrogen development plans in Australia, including its Hunter Valley Hydrogen Hub project in NSW, citing uncertainty in the market for the alternative fuel.

Origin shares closed 0.2 per cent higher on Friday at $10.34.

Originally published as China demands cheaper LNG deal from Origin Energy