China's LNG surplus heads west

Author Kwok Wan

The LNG glut is coming.  Everyone's been saying that for years. But how is it actually going to pan out?  We already have indications.

The LNG glut is coming.  Everyone's been saying that for years. But how is it actually going to pan out?  We already have indications.

In the rush to buy, it seems like some firms over-contracted, and are likely to dump leftovers in the LNG spot market.  By some firms, we mean Chinese firms.  By Chinese firms, we mean more specifically state-controlled oil companies CNOOC, Sinopec and PetroChina.

Last week, CNOOC issued a tender to sell two October-November cargoes from the 8.5mn t/yr Queensland Curtis LNG (QCLNG) project in Australia. Market participants said CNOOC was also looking to sell more QCLNG cargoes over the next three years, indicating that it has more LNG supply than it needs.

CNOOC has two LNG supply agreements with UK-listed energy firm BG totalling 8.6mn t/yr that BG is expected to fulfil mainly through the QCLNG plant, which it operates.

Sinopec could be in bigger trouble.  It is contracted to buy 7.6mn t/yr from the 9mn t/yr Australia Pacific LNG (APLNG) plant, which is expected to start up this month.

But Sinopec is not expected to absorb all its contracted volumes as it faces construction delays at two new 3mn t/yr import terminals. Its only operational terminal — the 3mn t/yr Qingdao facility — already receives cargoes under a 2mn t/yr contract with the 6.9mn t/yr Papua New Guinea LNG project.

Sinopec's contract is structured on a fob basis and the firm has been allowed to divert some of its cargoes to other terminals in China.  Sinopec has negotiated a special arrangement with the APLNG project to sell around 1mn t/yr of LNG on the spot market, market participants said.

And PetroChina has a contract for 2mn t/yr from Chevron's much-delayed 15.6mn t/yr Gorgon plant in Western Australia.  Can PetroChina reduce pipeline gas imports to take more LNG?  "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 told Argus.

Can the world's largest LNG buyer, Japan, soak up the excess?  Well, not really as it prefers rich LNG and new Australian supply is lean.  And Tokyo is slowly turning the country’s nuclear plants back on.  South Korea is also well supplied, while  India's LNG terminals are underutilised and consumers are switching to oil products following the fall in crude prices.

In Brazil, hydropower water levels look higher than in recent years, although they are still historically low. And Argentina has cancelled buy tenders, again citing more hydropower availability.

Maybe new importers Egypt, Jordan and Pakistan can absorb a few extra cargoes.  But their import capacity is not high enough.  Only Europe has enough LNG import infrastructure and a deep enough gas market to take the rest.

And with the Angola LNG plant due to restart and the US to begin exports before the end of this year, the excess is only going to grow.

For more LNG analysis, market commentary, news, and prices, see here: https://www.argusmedia.com/Natural-Gas-LNG

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