Source: East Asia Forum
Author: Xunpeng Shi, UTS
While the world watches developments in the novel coronavirus (COVID-19) outbreak, its impact on the energy sector has already emerged through weakening liquefied natural gas (LNG) exports. Bloomberg reported on 7 February that China’s largest LNG buyer, China National Offshore Oil Corporation (CNOOC), had informed some suppliers that it intended to reject the delivery of contracted cargoes in February and March this year. But two major LNG suppliers — Shell and Total — have rejected this force majeure claim.
CNOOC’s decision is a further blow to the historically weak LNG market. LNG prices plunged to a record low in Asian markets due to a warm winter and growing supply from the United States and Australia. The dramatically diminished gas demand from China due to the COVID-19 outbreak presents yet another challenge. Energy consultancy group Wood Mackenzie observed that China’s LNG demand has been ‘falling off a cliff’ since January 2020.
The weak demand and depressed spot prices could give LNG buyers more bargaining power, accelerating the transition of gas markets in East Asia — the destination of approximately 65 per cent of globally traded LNG. Key indicators of market transition are changes in gas-pricing mechanisms and its associated gas market liberalisation reform. The prevailing pricing mechanism for gas trade in East Asia is oil indexation, where the gas price is indexed to crude oil prices. In 2018, 79 per cent of Asia’s total gas import was priced on oil indexation and in long-term contracts.
The oil-indexed prices allow contracted natural gas prices to adjust to energy market developments without reopening contract negotiations. A shortcoming is that such oil-indexed …continue reading