Freeport LNG retracts force majeure, widening losses for gas buyers - sources

SK Gas

10/08/2022 17:20

(Updates to add quote)
    By Julia Payne and Marwa Rashad
    LONDON, Aug 10 (Reuters) - Top U.S. gas exporter, Freeport
LNG, has retracted the force majeure it initially declared after
an explosion in June, a development that could cost its buyers
billions of dollars in losses, a document showed and three
trading sources said.
    Force majeure is a notice used to describe events outside a
company's control, such as a natural disaster, which usually
releases it from contractual obligation without penalty. 
    The force majeure would also have allowed Freeport’s LNG
buyers to exit their own agreements to deliver gas to end users.
Instead, they are facing a collective loss of up to $8 billion
as they source alternative supplies at elevated spot market
prices, according to the trading sources, who have knowledge of
the matter, and calculations by a consultancy.
    Those buyers include BP  BP.L , TotalEnergies  TTEF.PA ,
Osaka Gas  9532.T , Japan’s top power generator JERA and South
Korea’s SK Gas Trading  018670.KS  and trading house Trafigura
that holds a small contract. 
    Freeport and the buyers declined to comment on the force
majeure, its retraction and potential losses. 
    Freeport accounts for 20% of U.S. LNG exports but stopped
shipments after the explosion on June 8, causing a spike in
global gas prices which had already soared on falling Russian
supplies to Europe and other outages.
    Freeport declared force majeure on June 9, before retracting
the notice around the end of June, two of the three sources with
knowledge of the matter said, adding that Freeport blamed human
error. 
    "No facts have been revealed that would indicate that the
incident was a result of Force Majeure," Freeport told market
participants on Aug. 3 in a notice seen by Reuters. 
    Neither the retraction nor the notice has been previously
reported.
    Freeport does not expect full operations to resume until the
end of the year, although a partial restart is scheduled for
October. Without the force majeure, the company needs to pay
compensation to its gas buyers and the buyers still need to
supply end users. 
    The outage leaves a hole of about 80 cargoes based on an
October restart date, according to Reuters calculations and an
LNG consultancy, although Freeport's buyers may not need to
replace them all depending on how they negotiate their onward
contracts. 
    The buyers had paid Freeport around $30-$50 million per LNG
cargo, according to two of the sources, with the fuel then sold
to end users at a premium usually amounting to a few millions of
dollars per cargo.
    Freeport's buyers would have to pay $100 million per cargo
based on Wednesday's spot market prices to replace the lost
volumes as LNG prices have doubled since the explosion, which
happened when markets were already tight.
    However, Freeport is offering buyers compensation of around
10% of the value of the purchased and undelivered cargoes or
lump sums of between $3 million-$5 million per cargo, according
to the two sources.
    "There are ongoing discussions taking place right now with
Freeport as the compensation they are offering will not cover
taking a spot cargo at today's rates," one of the sources said.
    Freeport declined to comment on its compensation policy.
    "The potential losses Freeport's offtakers may face... will
probably be within the range of about $6-$8 billion, on a
collective basis," said Tamir Druz, managing director at Capra
Energy, an LNG consultancy.
    “While some of these cargoes may not need to be replaced, on
a mark-to-market basis, it remains a significant loss.”
    Oil major BP has the largest contract at 4.4 million tonnes
per annum (mtpa) through 2040. JERA and Osaka Gas have contracts
at 2.3 mtpa each through 2039, while SK and TotalEnergies each
have 2.2 mtpa contracts running through 2040, according to the
International Group of Liquefied Natural Gas Importers.
    Based on Freeport paying 10% compensation per lost cargo,
losses may amount to about $2.3 billion for BP and $1.1 billion
for TotalEnergies on a mark-to-market basis, Capra Energy's Druz
said.
    BP and TotalEnergies declined to comment on any losses. 
    Mark-to-market is a way of measuring the fair value of
accounts based on current market prices, which is likely
different to the price paid to acquire them.
    Osaka Gas sharply cut its annual net profit forecast this
month citing a nearly 80 billion yen ($611 million) hit from the
Freeport outage for the second quarter alone.  urn:newsml:reuters.com:*:nL4N2ZE0YV

 (Reporting by Julia Payne and Marwa Rashad; Editing by Kirsten
Donovan)
 ((julia.payne@thomsonreuters.com; +44 207 542 1836;))