CNOOC tender underscores China LNG demand weakness

OREANDA-NEWS. A tender from China's state-controlled CNOOC to sell two October-November cargoes from the 8.5mn t/yr Queensland Curtis LNG (QCLNG) project is likely to be a precursor to moves by other Chinese importers to sell excess Australian term LNG volumes on the spot market.

CNOOC's tender, and the anticipated sales by its fellow state-controlled importers, reflect lower demand for gas from domestic customers in China as the country's economy slows. China may be oversupplied with LNG once its three new Australian term contracts get underway. The contracts total 18.2mn t/yr, only slightly below China's LNG imports of 19.9mn t/yr in 2014.

China's LNG imports fell by 4pc from a year earlier to 9.52mn t in January-June this year. State-controlled Chinese importers have joined with other northeast Asian buyers to avoid spot purchases as lower consumption leaves them with high inventory levels.

"Everyone is aware that China has surplus volumes from Australian projects and we have been told they have a mandate from their shareholders to sell their excess volumes on the global market," a trader with a northeast Asian buyer said.

CNOOC has two LNG supply agreements with UK-listed energy firm BG totalling 8.6mn t/yr that BG is expected to fulfill mainly through the QCLNG plant, which it operates. Fellow state-controlled firm Sinopec is contracted to buy 7.6mn t/yr from the soon-to-start 9mn t/yr Australia Pacific LNG plant, while state-run PetroChina has a contract for 2mn t/yr from Chevron's much-delayed 15.6mn t/yr Gorgon plant.

CNOOC is seeking to sell two cargoes, one for loading on 19-23 October and one for delivery on 18-19 November. Both cargoes were likely to have been allocated to CNOOC as part of a commercial arrangement with BG. CNOOC has s 50pc stake in QCLNG's train 1. The two cargoes are spot shipments and are unlikely to be scheduled deliveries under the firm's annual delivery programme or commissioning cargoes from QCLNG's second train.

CNOOC has emphasised it is offering spot, not term, cargoes. It said its demand and supply are "balanced" over the next two years. But market participants said the firm may be looking to sell two cargoes next year and six cargoes a year in 2017-18. It is unclear how many equity cargoes it is entitled to each year, but any future sales would most likely be term cargoes.

Sinopec is not expected to absorb all its contracted volumes as it faces construction delays at two new 3mn t/yr terminals. Its only operational terminal is the 3mn t/yr Qingdao import facility, which receives cargoes under a 2mn t/yr contract with the ExxonMobil-led 6.9mn t/yr Papua New Guinea LNG project. Sinopec's APLNG contract is expected to start at the end of this year, which is also when the first of two trains at the APLNG project is scheduled to reach full capacity.

Sinopec's contract is structured on a fob basis. Destination restrictions apply but the firm has been allowed to divert its cargoes to other terminals in China. CNOOC and PetroChina could agree to receive these cargoes in order to help a fellow state-controlled company. But it is unclear to what extent CNOOC and PetroChina can absorb the APLNG cargoes without displacing their own term deliveries. Any inability or failure to receive all its contracted cargoes would leave Sinopec subject to take-or-pay penalties. Buyers are obliged to receive all their contracted volumes or pay for the supply they are unable to receive.

Sinopec has negotiated a special arrangement with the APLNG project, in which it has a 25pc stake, to sell around 1mn t of LNG on the spot market, market participants said. This could not be confirmed with Sinopec, which said contract terms are confidential and cannot be divulged.

Recent market discussions have mostly centred on Sinopec's inability to absorb its APLNG cargoes. But PetroChina is likely to be facing a similar dilemma, especially as it has pipeline gas imports to manage in addition to its Gorgon supplies.

"Our demand will be considerably lower than previous years given the economic slowdown and sluggish downstream demand, as well as the ramp-up in pipeline imports from Central Asia," a PetroChina official said. "Contractually, we have some flexibility under our pipeline contracts to reduce our offtakes from central Asia. But we have already done this and used up all the flexibility on hand."

PetroChina's Gorgon contract will begin sometime next year, with first LNG shipments at the project now delayed to early 2016. The firm does not expect to reduce piped gas imports to avoid overstocking its LNG inventories.

Any Chinese importers that end up offloading their term supply on a spot basis will be selling into a market characterised by high supply availability from existing and new projects, as well as sluggish consumer demand. And they will need to compete with other projects that are scheduled to start up by early next year, including the 7.8mn t/yr Gladstone LNG in Australia, Malaysia's 1.2mn t/yr PFLNG export facility and the first 4.5mn t/yr train at the Sabine Pass project in the US.