LNG

Oil prices partially recovered after two days of turmoil as US crude futures stayed in positive territory but the North Sea Brent oil price was weak amid the supply glut, also shared with the LNG market as the Asian spot price dropped.

Woodside Petroleum, the operator of two LNG export plants in Western Australia, posted a 12 percent first-quarter increase in oil and gas production, though prices were down 20 percent along with revenues from the same three months a year ago.

Woodside, one of the biggest regional suppliers of LNG cargoes to North Asia, reported sales revenue of US$1.08 billion for the quarter ended March 31, down from US$1.36Bln a year earlier.

Production came to 24.2 million barrels of oil equivalent, up from 2.17M boe as the company mitigated the impacts of Tropical Cyclone Damien during the quarter.

Total LNG output for Woodside rose 4.5 percent to 18.31M boe from 17.53 boe in the prior-year quarter.

At the same time, Woodside like all other companies in the industry implemented responses to the combined effects of the Covid-19 outbreak and lower commodity prices.

Woodside’s first-quarter one-sixth share of LNG sales at the North West Shelf plant in Western Australia came to 606,577 tonnes, down from 652,246 tonnes in the same quarter of 2019.

The Perth-based company’s sales from its stake in the Chevron-operated the Wheatstone plant in the Pilbara region of Western Australia rose to 236,185 tonnes from 175,932 tonnes in the 2019 quarter.

At Woodside’s single-Train Pluto LNG plant sales amounted to 1.163 million tonnes in the quarter, up on last year’s 1.107MT.

“Tropical Cyclone Damien, which crossed the Western Australian coast in February, was the most significant weather event ever to pass over Woodside’s production facilities on the Burrup Peninsula,” stated Woodside Chief Executive Peter Coleman in the company's first-quarter report.

“Despite the severity of the storm, the team put in an outstanding effort to ensure the safety of our people and our assets and restore normal operations in a matter of days,” added the CEO.

“Nevertheless, revenue for the quarter was impacted by reduced trading activity and lower realised prices due to Covid-19 and an unprecedented combination of oversupply and short-term demand destruction,” stated Coleman.

“Of course, most of the quarter was overshadowed by the growing threat of the Covid-19 pandemic, which has required us to take swift and decisive action to protect our workforce, communities and operations,” he said.

Coleman noted that the company had already made “tough but prudent decisions” to ensure the financial integrity of the business with spending cuts in 2020 of 50 percent.

“A targeted final investment decision on our Scarborough and Pluto Train 2 developments has been deferred from this year to next,” said Coleman.

“We made solid progress on our near-term growth projects during the quarter, taking FID on Sangomar Field Development Phase 1 in Senegal and the North West Shelf’s Greater Western Flank Phase 3, as well as making significant execution progress on Pyxis Hub and Julimar-Brunello Phase 2,” he added.

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.

The West-East arbitrage window from the Atlantic Basin to the Pacific Basin that some forecast would be closed until October appeared to be in the process of re-opening after European natural gas prices had briefly overtaken those for the Asian spot LNG cargo market.