They said CNOOC, which operates nearly half the terminals in China that receive LNG, had declared force majeure, which allows companies to suspend their obligation to fulfil contracts after unexpected events such as strikes and natural disasters.
The biggest suppliers of LNG to CNOOC include Anglo-Dutch energy company Royal Dutch Shell, France's Total, Australia's Woodside Petroleum and Qatargas, industry sources said.
The force majeure notice covers CNOOC's LNG purchases for February and March, one of the two sources said.
China is the world's second-largest importer of LNG, and its spot purchases of the super-chilled fuel and other energy products have almost ground to a halt as the coronavirus spreads rapidly throughout the country.
LNG traders said they were scrambling to divert shipments or find new outlets for cargoes destined for China, driving spot prices for LNG in Asia <LNG-AS> to record lows.
"China was the place we sent cargoes to if demand was weak elsewhere in Asia but now people are trying to find alternative locations," one of the traders said.
The sources with knowledge of CNOOC's move declined to be named due to the sensitivity of the matter.
No further details were immediately available and a CNOOC spokeswoman did not answer calls from Reuters.
A Chinese international trade promotion agency said last week it would offer force majeure certificates to companies struggling with the fallout from the epidemic to give to their overseas partners.
WORKING FLAT OUT
China's PetroChina and Sinopec also supply CNOOC during the colder months from mid-November to mid-March under a state-mandated "inter-connected" supply scheme, another industry official with knowledge of the matter said.
It was not immediately clear which of CNOOC's LNG suppliers had been issued with a force majeure notice.
A Woodside representative said the company was closely monitoring the situation. Sinopec and Shell declined to comment and other suppliers were not immediately available for comment.
It was also not clear which unforeseen event CNOOC had cited when declaring force majeure.
Even before the outbreak of the virus, CNOOC had been offering to resell LNG cargoes because Chinese buyers have been struggling to shift high levels of stocks amid weak demand due to a slowing economy and a milder winter.
Baldev Bhinder, managing director of law firm Blackstone & Gold, said Chinese buyers may have difficulty establishing a link between the virus and their inability to fulfil contracts.
"That is where I see Chinese buyers having difficulty because weak demand and lower prices, which were already in play independent of the virus, cannot in itself establish force majeure causation," said Bhinder.
But if crew members were affected or terminals were closed to contain the spread of the virus, then there would be a stronger case, he said.
A top executive at an LNG terminal in northern China operated by PetroChina said its 80 staff has been working flat out on shifts since before the Lunar New Year break.
"With demand plunging, our tanks are topping. And workers are getting exhausted waiting for colleagues to return from holiday to relieve them," said the executive.
By Jessica Jaganathan and Chen Aizhu