Notices of 'force majeure' over coronavirus from China's LNG buyer CNOOC still have to be tested

Monday, 17 February 2020
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A growing number of LNG suppliers, including commodities trading firms such as Trafigura and national oil companies in the Middle East and elsewhere, have received “force majeure” notifications from China National Offshore Oil Corp. in which the effects of the coronavirus were cited.

CNOOC is the owner of nine Chinese LNG import terminals and has multiple oil and gas stakes.

The Chinese major's future project stakes include the Arctic II LNG joint venture led by Novatek of Russia.

CNOOC also receives regular LNG shipments from facilities such as BP’s Tangguh plant in Indonesia and the Woodside-operated North West Shelf plant in Western Australia as well as the Royal Dutch Shell-operated Queensland Curtis plant near Gladstone.

China imported a record 61 million tonnes of LNG during 2019, a 13.5 percent increase on the previous year and consolidated its position as the No. 2 importer after Japan and ahead of South Korea.

However, since the coronavirus outbreak some cargoes have been diverted and lawyers argue that simply declaring “force majeure” is not a straight forward procedure. It still has to have a contractual base.

Analysts have said that in addition to port workers being told to stay at home, China’s 20 LNG import terminal already had high storage levels.

This is because China like the other Northern Hemisphere countries had mild winter weather and much lower demand than expected for natural gas.

China receives more than 5 million tonnes per month of shipments from a diverse list of nations such as Australia, Qatar, Malaysia, Indonesia and Papua New Guinea as well as spot cargoes from West Africa and elsewhere.

Chinese LNG sourcing has diversified as it needs have grown. Imports increased by 38 percent in 2018 to 53.81MT compared with just over 39MT in 2017.

Lawyers have said that the ability of a Chinese buyer to seek “force majeure” protection depends on the LNG contracts, and defining this in the current market was complicated as not all events trigger a “force majeure”.

“Most LNG SPAs and MSPAs have a non-exhaustive list of events, which provided they satisfy the general test, are capable of being 'force majeure'. This may include items such as epidemics, but that is only the start of the issue,” according to the international law firm Ashurst.

Contracts also exclude certain events from being “force majeure”, such as the inability of a party to pay or a breach of law, or even changes in downstream markets and reduced gas demand.

French energy major Total said at its post-earnings conference earlier in February 2020 that there was a strong temptation from some long-term customers to use “force majeure“ to reject cargoes under long-term contracts, while still purchasing spot cargoes at lower prices.

The China Council for the Promotion of International Trade, which promotes foreign trade and investment, recently issued “force majeure” certificates to local companies to protect them from the commercial fallout of the coronavirus outbreak.

“A notice by an authority supporting the buyer’s claim may not be sufficient by itself. It will depend on the facts and the provisions of the LNG SPA,” Ashurst was quoted as saying.

The firm explained that the affected party would typically need to comply with provisions like taking reasonable measures to minimize the effects of “force majeure”, and even if the buyer is not entitled to “force majeure” it may have rights to divert cargoes to other markets or reduce offtake quantities.

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