It’s never good when companies start speaking in legalese. China National Offshore Oil Corporation, the country’s leading liquefied natural gas importer, has invoked the legal clause force majeure – which would allow it to suspend contracts because of the deadly coronavirus. China – the world’s second largest importer of LNG – has been responsible for much of the product’s demand growth, meaning the woefully oversupplied market could be in serious trouble.
Even before the virus, the LNG market was wobbling. Prices of the main benchmark used in Asia fell to just over $3 per million British Thermal units last Wednesday – a record low – from well over $5 before the crisis. The last time the price dipped below $4 was July 2009. A warmer winter in China reduced demand even as product from the U.S. and Australia kept supply robust. If counterparties start to get antsy about the legal position of their contracts, things would get even worse.
CNOOC’s use of force majeure is probably a long shot. The legal clause is normally invoked when a company can’t fulfill an obligation because of something completely uncontrollable – like natural disasters or civil unrest – not low demand. Unless quarantines make it physically impossible for Chinese importers to accept gas, the legal case looks far from watertight.
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