“LNG will bear the brunt of this reduction in domestic gas demand,” analysts commented, estimating the downside impact to Chinese LNG demand as between 2.6 million tonnes (Mt) ‘best case’ with recovery by April, and 6.3 Mt in a more ‘prolonged case’ with a slower return to normal.
Upstream activities in China stall largely as travel restrictions reduce manpower onsite. Baseload pipeline gas deliveries, however, as less affected as they can be handled in close-off. Hence, Wood Mackenzie estimates China’s domestic gas supply will be lower by between 1.6 Bcm and 2.9 Bcm this year.
Supply correction needed
Faltering Chinese gas demand could not have come at a worse time for the already oversupplied global LNG market. “Disappointing demand growth in Asia Pacific contributed to the halving of LNG prices through 2019,” research director Robert Sims said, “and with further new volumes emerging from U.S. producers, we were already anticipating lower prices through 2020.
Prior to the coronavirus outbreak, analysts had hoped the Pacific Basin gas market would 9 Mt of the approximately 27 Mt of new supply growth in 2020. However, a mild winter had already weakened prices at the North Asian spot market before the virus stifled demand in China.
“With too much LNG, and nowhere left to place it, it looks like a supply correction is needed to balance the market,” Sims said. “We are expecting supply response in some markets like Egypt and potentially in Eastern Australia, where the likes of Shell and APLNG could attempt to sell gas into the domestic Queensland gas market.
“However, it is US Gulf producers who have the highest marginal cost of supply and the most flexibility,” he stressed, implying there might be some shut-ins of liquefaction capacity along the Gulf of Mexico.
LNG contracts under force majeure
Encouraged by the Chinese government, CNOOC declared force majeure on LNG import contracts. CNPC and Sinopec could soon follow suit. However, Shell and Total already dismissed the validity of ‘force majeure’ in the current circumstances and threatened to seek compensation.
Critics argue the wide spread between high contracted long-term prices and low spot market prices have prompted CNOOC to exercise force majeure. If Chinese buyers succeed in doing so, the revenue impact on sellers could be significant.
The approximate price for many of these oil-indexed contracts is around 14.5 percent of oil range, equating to $8.83 per million British thermal units (MMbtu), using $54 per barrel of oil equivalent. According to Wood Mackenzie figures, this compares with spot prices of around $3.15/MMBtu.
Total contracted volume into China in 2020 is 54 million tonnes per annum. “While major Chinese buyers may call for force majeure, suppliers may instead insist on trying to defer deliveries to later in the year once the demand impact of coronavirus has diminished,” Sims concluded.