The outbreak of the coronavirus has had a significant impact on China’s LNG imports. Depending on the length of time required to control the epidemic, China’s gas demand is likely down by up to 14 billion cu m (bcm) throughout 2020, according to Wood Mackenzie.
The China Council for the Promotion of International Trade has offered force majeure (FM) certificates to Chinese entities. The China National Offshore Oil Corp. (CNOOC) declared FM on many LNG cargoes. Other importers, including PetroChina and Sinopec, are also looking to delay or defer cargoes scheduled for delivery through April.
Under English law, a common choice for long-term Asian LNG contracts, FM is a form of relief that is available only if and to the extent provided in the relevant contract. Whilst there is no standard form of FM clause, long-term LNG contracts typically require that the party claiming FM must have acted as a “Reasonable and Prudent Operator”.1
Generally, the FM clause provides a non-exhaustive list of such events, as well as a list of events that are not eligible for FM under any circumstances. Typically, a list of FM events includes specific extreme weather events, natural disasters, civil strife, sanctions, radioactivity, strikes, acts of government agencies that are generally applicable in the relevant country, and changes in law. Epidemics are also often designated; but because such lists are usually non-exhaustive, the lack of clear references may not be decisive.
Events that are not eligible for FM include the ability of the buyer to obtain better terms from other sellers, changes in the market or demand for LNG, events affecting downstream customer facilities, and acts of governmental authorities that are applicable solely or primarily to the requesting party.
The party claiming FM must immediately identify the FM event, the performance that was delayed or prevented by it, the expected duration of such delay or prevention, and explain the measures to be taken to resume the performance. Usually, the other party has the right to inspect to verify the FM event. Both parties should seek to arrange alternative performances.
If the above requirements are satisfied and alternative performance cannot be arranged, FM relief may be available. If the requesting party is the buyer, if the conditions for FM are met, its obligation to purchase LNG may be suspended.
Coronavirus
As mentioned, depending on the terms of each contract, epidemics can be a valid reason for force majeure. If government actions to control the epidemic result in the closing of the receiving terminals and alternative performance cannot be undertaken, FM relief may be available.
However, given the spread between high contract prices and currently low spot market prices, both parties have strong commercial incentive to resist each other’s actions. The seller will strictly investigate whether all the required elements of the FM are indeed met. CNOOC’s suppliers are evaluating other options, such as cargo diversions to other terminals. Total SA has publicly rejected the force majeure declaration: “If there is a real quarantine in all the loading ports and unloading ports in China, we’ll have a real case for force majeure. For the time being, this is not the case.” Shell declared similar opinions.
Suppliers are also trying to find ways to minimize the number of goods to comply with these declarations. Suppliers may also insist on delaying delivery until later this year once the impact of coronavirus on demand weakens.
If all of this does not work, suppliers will have to accept the declarations as valid, in which case they will have to absorb the loss, or they will reject the statement. In the latter case, the supplier will be compelled to send invoices to buyers for the missed cargoes. However, given the current LNG supply glut, suppliers want to avoid this, as it could affect their relationship with buyers in the world’s most important markets.
Reference
- Coronavirus/Covid-19 And “Force Majeure” Under Long-Term Asian LNG Contracts, Feb. 20, 2020, Justin Williams, Michael Joyce, Paul Greening, and Conor Mc Stravick, Akin Gump Strauss Hauer & Feld LLP.
Conglin Xu | Managing Editor-Economics
Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor.
Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.