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Haynes and Boone partners comment on CNOOC declaration of force majeure

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LNG Industry,

Following the news that China National Offshore Oil Corp. has invoked force majeure on several LNG deliveries, Rob Patterson and Myles Mantle, London Partners at law firm Haynes and Boone, have offered their insights.

Myles Mantle commented: “Those of a more cynical disposition would say this may be an attempt to unwind long-term LNG sales and purchase contracts using force majeure as an excuse, on the basis the LNG spot market prices are significantly lower and there is excess supply in the market right now, with potentially new suppliers whispering in the ear of the buyers that they can achieve same volumes at much lower prices.

“It’s worth mentioning the price difference between long-term sales and the spot market. Unless there is this mysterious alternative supplier out there able to cover all volumes, it would be very short term thinking as the spot market does not seem significantly developed to be able to cover the volumes required, and Chinese companies have spent years trying to build up sustainable supply.

“This would also severely damage relationships and willingness of suppliers to enter into long-term contracts in the future, and where suppliers have used those long-term contracts as a basis of FID and financing for their LNG production facilities.”

Rob Patterson added: “Given the adverse impact on the Chinese economy that the coronavirus outbreak will undoubtedly have, it’s perhaps not surprising that Chinese LNG buyers may be looking at ways of reducing or suspending their take obligations under long-term supply contracts. Serving a force majeure notice is likely to be the obvious first step.

“Obviously each contract would need to be looked at individually, but we think it is unlikely that the outbreak, and the reduced LNG demand resulting from it, will – on its own – constitute force majeure under many supply contracts.

“Force majeure is usually aimed at dealing with events such as unforeseen operational outages, rather than changes in broader economic circumstances, such as LNG demand or exchange rates. We would expect changes like that often to be expressly carved out of the force majeure definition, leaving the risk in this case with the buyer. It might be different if the coronavirus (or government shutdowns or regulations resulting from it) had the effect of causing operational constraints in the receiving terminal infrastructure, which prevent a buyer from receiving the LNG, but that would depend on the terms of the particular contract.

“That is not to say that sellers might not be sympathetic to the buyers’ concerns, given that the effects of the virus are likely, we hope, to be short-lived and that China is going to remain a key player in the LNG market for years to come.

“Most long-term LNG purchase contracts will include take-or-pay obligations, which in broad terms require a buyer to pay for a certain quantity of LNG even if it doesn’t take it, on the understanding (usually) that the buyer can receive that LNG for free (or, at least, at a reduced price) at some point in the future. It may be that those provisions also become an area for discussion now, but again much will depend on the terms of the contracts themselves.”

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