ABERDEEN/SINGAPORE (Reuters) – French oil major Total rejected a force majeure notice from a liquefied natural gas (LNG) buyer in China, the first global energy supplier to push back publicly against a firm trying to back out of a contract amid the coronavirus outbreak.
The move by the Chinese buyer is likely to increase concerns that Chinese importers, or even exporters of product parts to global firms, could use force majeure certificates to get out of long-term contracts, trade sources said.
Companies invoke force majeure when they cannot meet their contractual obligations because of circumstances beyond their control.
The effect is being felt in the spot crude oil and LNG market as sales have slowed into China, the world’s top energy consumer, increasing supplies and depressing energy prices.
Last week, a Chinese international trade promotion agency said it would offer force majeure certificates to companies struggling with the epidemic to give to their overseas partners.
So far, most of the applications for the certificates had been from Chinese exporters, although there were a few inquiries from importers, a source familiar the matter said.
The outbreak, which has claimed more than 630 lives and infected over 31,000 people, has forced companies to shut factories and stores across China and led to flight cancellations as governments and firms curb travel.
“Some Chinese customers, at least one, are trying to use the coronavirus to say I have force majeure,” Philippe Sauquet, head of Total’s gas, renewables and power segment, said on Thursday.
“We have received one force majeure that we have rejected.”
Sauquet did not disclose the name of the buyer.
Total has about 10 LNG cargoes due to land in China this month and at risk of force majeure, according to a person familiar with the matter. Among 35 LNG tankers scheduled to land this month, Royal Dutch Shell and Qatargas, a unit of Qatar Petroleum, also have large Chinese exposures, the person said.
Total, Shell and Qatargas did not immediately reply to requests for comment on the cargoes at risk.
China National Offshore Oil Corporation (CNOOC), which sources said is among Total’s biggest LNG customers, declared force majeure on some prompt deliveries with at least three suppliers, Reuters reported on Thursday.
CNOOC did not respond to a request for comment.
“This rift has the potential to become quite ugly because of the contractual precedent it threatens to set,” said Ira Joseph, head of global gas and power analytics at S&P Global Platts.
Guangxi Nanguo Copper, a smelter in Southwest China, on Friday also declared force majeure on copper concentrate shipments, two sources briefed on the matter told Reuters.
MISUSE?
Prices of LNG supplied from long-term contracts are currently more than double the cost of spot cargoes.
Chinese companies including CNOOC were offering to resell LNG cargoes in the spot market even before the outbreak, as they struggled to shift high inventory amid weak demand due to a slowing economy and a milder winter.
“There is a strong temptation from some long-term customers to try to play with the force majeure concept,” Total’s Sauquet said. “To say I cannot take my cargo under the long-term contract, but I would like to buy spot is contradictory.”
LNG contracts are typically governed by English law which spell out events constituting a force majeure and some may include the epidemic clause, lawyers told Reuters. Serving the force majeure notice is the first step in a drawn out process, they said.
Also, the onus to demonstrate a force majeure is on buyers to prove that they are not physically able to receive the cargo. For instance, if there are port closures or if workers are unable to get to the ports due to the virus.
“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,” said Rob Patterson, partner at law firm Haynes and Boone.
BONN – In the face of climate change, providing reliable supplies of renewable energy to all who need it has become one of the biggest development challenges of our time. Meeting the international community’s commitment to keep global warming below 1.5-2°C, relative to preindustrial levels, will require expanded use of bioenergy, carbon storage and capture, land-based mitigation strategies like reforestation, and other measures.
The problem is that these potential solutions tend to be discussed only at the margins of international policy circles, if at all. And yet experts estimate that the global carbon budget – the amount of additional carbon dioxide we can still emit without triggering potentially catastrophic climate change – will run out in a mere ten years. That means there is an urgent need to ramp up bioenergy and land-based mitigation options. We already have the science to do so, and the longer we delay, the greater the possibility that these methods will no longer be viable.
Renewable energy is the best option for averting the most destructive effects of climate change. For six of the last seven years, the global growth of renewable-energy capacity has outpaced that of non-renewables. But while solar and wind are blazing new trails, they still are not meeting global demand.
A decade ago, bioenergy was seen as the most likely candidate to close or at least reduce the supply gap. But its development has stalled for two major reasons. First, efforts to promote it had negative unintended consequences. The incentives used to scale it up led to the rapid conversion of invaluable virgin land. Tropical forests and other vital ecosystems were transformed into biofuel production zones, creating new threats of food insecurity, water scarcity, biodiversity loss, land degradation, and desertification.
In its Special Report on Climate Change and Land last August, the Intergovernmental Panel on Climate Change showed that scale and context are the two most important factors to consider when assessing the costs and benefits of biofuel production. Large monocultural biofuel farms simply are not viable. But biofuel farms that are appropriately placed and fully integrated with other activities in the landscape can be sustained ecologically.
Equally important is the context in which biofuels are being produced – meaning the type of land being used, the variety of biofuel crops being grown, and the climate-management regimes that are in place. The costs associated with biofuel production are significantly reduced when it occurs on previously degraded land, or on land that has been freed up through improved agriculture or livestock management.
Under the 1.5°C warming scenario, an estimated 700 million hectares of land will be needed for bioenergy feedstocks. There are multiple ways to achieve this level of bioenergy production sustainably. For example, policies to reduce food waste could free up to 140 million additional hectares. And some portion of the two billion hectares of land that have been degraded in past decades could be restored.
The second reason that bioenergy stalled is that it, too, emits carbon. This challenge persists, because the process of carbon capture remains contentious. We simply do not know what long-term effects might follow from capturing carbon and compressing it into hard rock for storage underground. But academic researchers and the private sector are working on innovations to make the technology viable. Compressed carbon, for example, could be used as a building material, which would be a game changer if scaled up to industrial-level use.
Moreover, whereas traditional bioenergy feedstocks such as acacia, sugarcane, sweet sorghum, managed forests, and animal waste pose sustainability challenges, researchers at the University of Oxford are now experimenting with the more water-efficient succulent plants. Again, succulents could be a game changer, particularly for dryland populations who have a lot of arid degraded land suitable for cultivation. Many of these communities desperately need energy, but would struggle to maintain solar and wind facilities, owing to the constant threat posed by dust and sandstorms.
In Garalo commune, Mali, for example, small-scale farmers are using 600 hectares previously allocated to water-guzzling cotton crops to supply jatropha oil to a hybrid power plant. And in Sweden, the total share of biomass used as fuel – most of it sourced from managed forests – reached 47% in 2017, according to Statistics Sweden. Successful models such as these can show us the way forward.
Ultimately, a reliable supply of energy is just as important as an adequate supply of productive land. That will be especially true in the coming decades, when the global population is expected to exceed 9.7 billion people. And yet, if global warming is allowed to reach 3°C, the ensuing climatic effects would make almost all land-based mitigation options useless.
That means we must act now to prevent the loss of vital land resources. We need stronger governance mechanisms to keep food, energy, and environmental needs in balance. Failing to unleash the full potential of the land-based mitigation options that are currently at our disposal would be an unforgiveable failure, imposing severe consequences on people who have contributed the least to climate change.
Bioenergy and land-based mitigation are not silver bullets. But they will buy us some time. As such, they must be part of the broader response to climate change. The next decade may be our last chance to get the land working for everyone.