Malaysia’s state-owned Petronas is seeking to exercise its right to reduce contractual deliveries this winter to buyers with offtake from the Malaysia LNG (MLNG) 3 joint venture that comprises the firm’s 29.3 million tonnes a year (mtpa) Bintulu LNG export complex in Sarawak due to gas supply issues
A cut in contracted term supplies would hit buyers during their peak demand season and possibly force them to seek replacement cargoes at a time when Asian spot LNG prices are already at new highs for this time of year.
Petronas expects to lose five cargoes across November and December, and four cargoes a month in January and February and around one and a half cargoes a month between March and November 2022 due to a high concentration of mercury in the gas stream from the new Pegaga gas field, term offtakers at MLNG 3 said. The field was meant to come online this month and begin supplying feed gas to Bintulu, they added. Petronas did not respond to Kpler’s queries about the lost output and its request to cut winter term deliveries.
“Petronas is planning to exercise DQT, but there is a gap between buyer and seller in terms of the interpretation of the SPA (supply and purchase agreement),” an official at a term offtaker at MLNG 3 said. “They think they have a right to do so, but buyers don’t think so. So we are still in discussions.” A DQT, or downward quantity tolerance, clause in a term supply contract allows the buyer or seller the right to request a reduction, typically of around 10%, in annual term deliveries.
The Bintulu complex comprises nine liquefaction trains that are operated by four joint ventures - MLNG 1 that operates Trains 1-3. MLNG 2 that operates Trains 4-6, MLNG 3 that operates Trains 7 and 8 and Petronas LNG Sdn Bhd (PL9SB) that operates Train 9. MLNG 3 term offtakers include Korea’s state-owned Kogas, China’s state-owned CNOOC and Japan’s Japex, Osaka Gas, Toho Gas, Tokyo Gas and Tohoku Electric, which collectively offtake around 7.18 mt of LNG. Each of the 3.8 mtpa MLNG 3 trains - 7 and 8 - can produce around five cargoes a month at nameplate capacity assuming a 60,000t cargo size.
Petronas told MLNG 3 offtakers that the mercury issue at Pegaga only affects MLNG 3 term offtakers because the gas flow from the field is tied to MLNG 3 facilities, the offtakers said.
A few offtakers from the other Malaysia LNG joint ventures said Petronas informed them of the mercury in feed gas issue but that the delivery schedules for their cargoes would be unaffected.
Spot prices have outpaced the cost of term supplies
The expected loss of LNG supply at Bintulu from November comes as spot LNG prices continue to climb in the run up to winter, outpacing the cost of term LNG supplies. And supplies are likely to tighten, pushing prices up even further if buyers seek replacement cargoes from the spot market.
Competition for cargoes between Asian and European buyers and surging Dutch TTF gas hub prices, underpinned by low gas storage levels and a decline in European gas output, have pushed Asian spot prices to their highest level for this time of year. They were last around $20/mmBtu in early January, thanks to a confluence of such factors as a plunge in temperatures, strong consumer demand, extreme tightness of prompt LNG supplies and a shortage of available spot LNG tankers.
A few of the offtakers at MLNG 3 are negotiating with other term suppliers to advance term cargoes from next year’s delivery schedule to make up for any lost cargoes from Petronas this winter and to avoid buying spot cargoes, even as discussions with the Malaysian firm continue.
But, they are mindful that securing cargoes at term contract prices will be challenging, given spot prices are almost double that of most Asian oil-linked term contracts. Many contracts held by Asian LNG buyers are indexed to oil at around 14-15%, putting them at around $10.11/mmBtu to $10.83/mmBtu based on the front-month Ice Brent settlement at $72.22/bbl on Sep. 6. Market participants pegged tradable levels for spot deliveries to northeast in November at around just shy of $21/mmBtu today.
Market participants expect that Petronas may try to reduce cargo sizes to fulfill some term deliveries, if not all term offtakers at MLNG 3 agree to its request to cut term deliveries. The status of the discussions between Petronas and the buyers is still unclear.
The Pegaga gas field offshore Sarawak is a new field that was expected to begin production this month, but no gas will flow from the field until mercury from the gas stream is removed. Petronas is planning to install a temporary mercury removal unit in March which will reduce the number of LNG cargoes lost from four cargoes each in January and February to one and a half cargoes a month from March 2022 until it installs a permanent mercury removal unit in November 2022, according to the official at a MLNG 3 term offtaker.
But Petronas is trying to mitigate the impact of the estimated output loss of 500 mn ft3 a day, or around four cargoes a month, by ramping up output at its other fields, term offtakers said. The Malaysian producer expects this to pare the loss across November and December to five cargoes instead of 8 cargoes.
A push back in planned maintenance at the plant to August from a few months earlier due to Covid-induced manpower shortages and an extension to the maintenance is also expected to contribute to a greater reduction in output over August to October.
Monthly shipments dipped below 2 mt between June and August compared to earlier this year when they ranged between 2.1 mt to 2.3 mt. But Bintulu’s January to August shipments at 16.82 mt were still slightly higher than the 15.82 mt it shipped a year earlier.
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