Gas alarm as exports to China under threat in wake of virus crisis
Australian gas exporters face a potential supply hit amid signs Chinese buyers are considering force majeure declarations.
Australian gas exporters face a potential supply hit amid signs China’s biggest LNG buyers are considering emergency force majeure declarations as the coronavirus slows demand for the fuel.
With oil consumption already plummeting by up to 20 per cent, fears are now growing that the world’s biggest gas importer may seek to limit volumes of LNG to reflect weaker power demand and industrial activity.
Declaring force majeure on contracted LNG cargoes “is possible as contracts often include epidemics as a trigger and the government has reportedly offered companies force majeure certificates”, Wood Mackenzie Asia-Pacific vice chairman Gavin Thompson said on Tuesday.
“LNG demand has fallen off a cliff since January. An LNG trader just told me Chinese demand has ‘disappeared’, and buyers will be looking at all options.”
The move could prove a major risk for Australia’s LNG export industry, which supplied 46 per cent of Chinese LNG in the 2019 financial year, according to consultancy EnergyQuest.
The bulk of those volumes came from Queensland LNG projects, with the Origin Energy-led APLNG venture and Shell’s QCLNG plant both being big suppliers to China.
China’s three major oil and gas companies also hold significant equity stakes in the state’s gas sector, with Sinopec a partner in APLNG, CNOOC in QCLNG and PetroChina in the Arrow Energy venture operated by Shell.
The rapid fall in spot LNG prices will also compound the headache for Chinese buyers who are locked into contracts with Australian exporters, according to Credit Suisse.
“Chinese LNG buyers are under pressure given the sudden demand weakness in the wake of the virus compounding the difficulty posed by contracted LNG volumes being priced much higher than prevailing spot prices,” Credit Suisse analyst Saul Kavonic said.
“It appears to remain just a hypothetical risk at this point, but if force majeure were successfully invoked by Chinese buyers it could see producers forced to sell LNG cargoes into the spot market at prices close to a third of contract prices.”
An added point of tension is also emerging around the ability of LNG tankers to deliver gas to buyers in China, and also then to return to Australian ports.
The 14-day quarantine on Australian vessels that leave mainland China after February 1 could cause delays and bottlenecks at the Queensland LNG port of Gladstone, which typically receives ships every few days.
Similarly, there could be a knock-on effect from tankers travelling to China when they attempt to travel to other international destinations.
“Another hypothetical risk to consider is if any LNG tanker becomes wary of delivering to Chinese ports lest they be restricted from other global ports later,” Mr Kavonic said.
China’s LNG demand exploded in the past few years, growing by 51 per cent in 2017-18 and 27 per cent in 2018-19, but it fell to about 9 per cent growth last year.