By Bloomberg Intelligence
Virus concern shows when it rains for LNG exporters, it pours
Chinese LNG demand could weaken further, which would worsen global market conditions and hurt Australia LNG exports the most, in our view. Challenges facing proposed projects, particularly in the U.S., are intensifying.
Coronavirus another hit to fragile LNG market
The already weakened global LNG market is at more risk, in our view, as mounting coronavirus concerns exacerbate a supply glut and demand already curbed by mild weather and high inventories.
These factors have pulled Asia spot LNG prices to a record low of $3.51 per million BTUs, and we aren't even in the seasonally weaker 2Q yet.
The virus is threatening economic growth and gas demand in China, the second-largest LNG importer on an annual basis, compounding
pressure on prices that we expect to slip more and likely limiting a key safety valve for spot LNG cargoes.
CNOOC, PetroChina and Sinopec are considering force majeure declarations, which could be the nail in the coffin for depressed LNG prices. This would permit the delay or cancellation of some LNG cargoes part of long-term agreements.
Pressure on Australia, Qatar LNG, U.S. proposed projects
Weaker Chinese LNG demand and potential force majeure declarations could hurt Australian and Qatari LNG most, in our view, given they're the largest exporters to China. This would affect companies such as Woodside, Santos, Chevron, Shell and Qatargas. From a U.S. perspective, the effect on the depressed market from coronavirus amplifies pressure on companies seeking project FID, such as NextDecade and LNG Ltd., which are already challenged to secure off-take agreements.
We expect some U.S. cargoes may periodically be canceled and a prolonged maintenance season, but anticipate U.S. exporters such as Cheniere and Sempra to avoid shut-ins. U.S. gas is among the cheapest in the world, and we believe more expensive oil-linked contracts in other nations that are the highest above spot prices could be targeted first.
LNG market at risk of more Chinese cargo cancellations, delays
The Australia Pacific (APLNG), Gorgon and Qatargas LNG projects could be most vulnerable if PetroChina and Sinopec follow Cnooc in declaring force majeure, based on our analysis. About 84% of APLNG's nine million tons in annual capacity is contracted with Sinopec, which owns 25% of the project, along with Origin and Conoco. Chevron operates Gorgon, but Exxon and Shell each own 25%, and have contracts with PetroChina for a total of 4.3 million tons a year. More cargo cancellations, delays or diversions could worsen the strained LNG market.
Cnooc invoked force majeure, which Total and Shell rejected. The Shell and Cnooc-owned Queensland Curtis LNG project in Australia is highly exposed as 67% of LNG volume goes to China, according to data compiled by Bloomberg, IHS and Genscape. Australia makes up 47% of China's LNG imports.
