China is offering life support to beleaguered US and other liquefied natural gas (LNG) producers hit by the double whammy of a multi-year supply overhang and the Covid-19 pandemic’s rising economic fallout. China’s procurement of US LNG represents a certain olive branch after a 13-month punitive halt on purchases due to the US-China trade war.
On April 20, the US LNG tanker Maran Gas Vergina berthed in Tianjin, where oil and gas super majors Chinese National Offshore Oil Company (CNOOC) and Sinopec operate LNG receiving terminals. Three more US gas cargoes are expected to arrive later this month and two in May, Refinitiv shipping data shows.
The delivery comes just two months after Beijing announced it would grant exemptions on retaliatory duties imposed on nearly 700 US goods including some commodities, and after Washington and Beijing reached a so-called Phase 1 trade deal late last year. Beijing promised to boost its US energy purchases by as much as US$52.4 billion over the next two years as part of the trade agreement, which kicked in on January 15.
Analysts believe that China is trying to show that it’s at least partially sticking to its side of the deal through LNG imports. To date, China has not imported any crude oil from the US, even as the price for West Texas Intermediate (WTI) is trading at a growing differential to Brent and other crude grades Beijing is now stockpiling.
To be sure, five LNG cargoes is just a drop in the bucket for China to fulfill its $52.4 billion pledge over 2020 and 2021. For China to meet its Phase 1 trade deal commitments, it will have to ramp up purchases of both LNG and US crude. US LNG imports to China face headwinds, however, as spot prices for the fuel in Asia are now trading at multi-year lows.
China slapped a 10% duty on LNG imports from the US in the fall of 2018 in a pushback against US imposed duties on Chinese goods. Beijing later raised them to a cost prohibitive 25%, sending several US LNG project proposals into a tailspin as they sought new investors and long-term off-take agreements to keep the projects afloat.
The lack of Chinese involvement in new US LNG project proposals has threatened the industry’s second wave of development and could put American ambitions of becoming the world’s top LNG exporter in jeopardy.
Currently, Australia is the top global LNG exporter, followed by Qatar and then the US, which bypassed Malaysia last May.
Even before the impact of the Covid-19 pandemic eroded LNG demand, markets for the super-cooled fuel were under enormous pressure due to an ongoing historic multi-year supply overhang, mostly from production ramp-ups in the US and Australia that have sent prices south toward breakeven points for many producers.
Now, as a supply-flooded market intersects with Covid-19 LNG demand destruction, reverberations are being felt through the entire global LNG value chain.
On April 23, buyers in Asia and Europe cancelled at least 20 LNG cargoes from the US scheduled for deliverery in June. The majority of the cargoes were from Cheniere Energy’s plants in Sabine Pass, Louisiana and Corpus Christie, Texas.
Prices for spot LNG in the Asia Pacific region, which accounts for around two-thirds of global LNG demand, meanwhile continue to tank.
Last week, Japan Korea Marker (JKM) prices for spot LNG into North Asia dipped below the psychologically and economically troubling $2 per million British Thermal Units (MMBtu) price point, at $1.94/MMBtu, according to global commodities provider S&P Global Platts.
Spot prices for the fuel were fetching nearly $7/MMBtu at this time last year, even though markets were already facing a persistent supply overhang.
To put the $2/MMBtu price in perspective, LNG spot prices in Asia breached $20/MMBtu in February 2014, amid a then somewhat limited supply of the fuel and increased spot purchases by Japan.
At the time, Japan was still grappling with replacing lost nuclear capacity needed for power generation in the wake of the 2011 Fukushima Daiichi nuclear disaster, which eventually forced all of its 50 plus nuclear facilities out of service due to safety concerns.
Despite being the origin of the Covid-19 pandemic, China’s natural gas thirst was never completely quenched.
After Beijing imposed quarantines and travel restrictions on large parts of the country in early February, CNOOC (China’s largest LNG importer) invoked force majeure, which allows companies to opt out of contractual obligations due to events beyond their control, with at least three of its major LNG suppliers, including Royal Dutch Shell, France’s Total SA and British oil and gas major BP.
On March 5, state-run PetroChina followed suit and reportedly issued force majeure notices to some of its suppliers of piped gas and LNG. However, by early April, China’s LNG sector was making a comeback as the country clawed its way out of lockdown.
Chinese buyers, taking advantage of rock bottom prices, have since become among the most active in global LNG markets. China’s gas consumption recovery was stoked by a March rebound in manufacturing activity as factories ramped up operations after weeks of work suspensions, according to news reports.
Andy Flower, former head of LNG at BP and now an independent analyst, said during a London-based LNG markets webinar on April 24 that initially around half a million tons of supply, or about seven or eight LNG cargoes, to China were being diverted and waiting because of a lack of workers at [receiving terminals], but the country still had increased gas demand.
“Despite being locked down, and the Chinese New Year extended to stop the [coronavirus] outbreak, Chinese output stood up quite well,” he said.
For the first two months of the year, China imported 11.13 million metric tons (mt) of LNG, up 2.3% year on year from the 10.88 million mt over January-February 2019, data released by China’s General Administration of Customs shows.
However, the 2.3% figure still represents a marked contraction since China’s LNG imports for the first two months of 2019 were 19.7% higher compared to the first two months of 2018.
Australia, Qatar and Malaysia remained the top three LNG suppliers to China over the January and February period this year. China’s LNG imports from Australia were up 21% year on year, but imports from Qatar and Malaysia were down 13.4% and 25.7% year on year, respectively, the data showed.
China’s LNG imports from Russia registered a significant growth, up 576.9% at 872,528 mt in the first two months of this year from the same period last year. During March, China’s LNG imports were also up 4.3% at 4.19 million mt from the same period last year, according to customs data published on April 23.
Natural gas demand, for its part, usually holds up better than its hydrocarbon big brother crude oil during economic recessions because around 57% of oil is used for the transportation sector, particularly air flights and automobile travel, while up to 87% of gas demand is derived from the power generation sector, as well as home heating and residential use.
“China’s LNG demand will come back strongly over the rest of 2020, following the impact of the coronavirus outbreak in the country,” said Peter Coleman, CEO of independent Australian gas producer Woodside Petroleum, in a media interview.
Woodside’s North West Shelf (NWS) LNG venture offshore Western Australia has a 3.3 million tons per annum (mtpa) sales and purchase agreement with CNOOC for its 6.7 mtpa LNG terminal in Dapeng in China’s southern Guangdong province, a manufacturing hub.
Coleman added that the LNG demand outlook in Europe and the US is less certain [than China] given that both regions are now bearing the brunt of the coronavirus pandemic.