Transcript Slide 1
TYPICAL MISMATCHES BETWEEN LNG SUPPLY CONTRACTS AND US GAS MARKETING AGREEMENTS East Coast AIPN Luncheon and Roundtable Hosted by Chadbourne & Parke LLP Washington D.C. October 1, 2004 © 2004, CHADBOURNE & PARKE LLP All Rights Reserved Overview of Presentation Volume and Scheduling Mismatches Force Majeure Mismatches Force Majeure in LNG Transport Contracts Pricing Credit Mismatches Support Mismatches 2 Volume and Scheduling Mismatches LNG supply contracts Annual contract quantities & adjustments Annual / quarterly take-or-pay obligations Annual delivery program / 90 day program / ratable deliveries Delivery in ‘Standard Cargo Lots’ (usually range from 87,000 cbm to 138,000 cbm) Physical storage & vaporization / send-out constraints Non-availability of ‘Cover LNG’ in event of Seller’s delivery failure Buyer’s ‘reasonable efforts’ undertaking to receive off-specification LNG prior to exercise of rejection rights LNG boil-off during loading, transportation and discharge operations 3 Volume and Scheduling Mismatches (continued) Typical downstream gas marketing contracts Monthly / daily / hourly delivery quantities & adjustments Take-or-pay obligations Pipeline takeaway constraints & imbalance charges Availability of cover gas or alternative fuel in event of delivery failures Buyer’s right to reject all or part of offspecification gas (UCC and UK Sale of Goods Act) 4 Force Majeure Issues Typical force majeure Scope of coverage clauses in LNG SPAs ‘Traditional’ force majeure events Upstream facility events Marine transportation events Downstream customer facility events Construction-related events Political events Events affecting third-parties Responsibilities of the party seeking force majeure relief Notification of event and anticipated duration Mitigation obligation & use of diligence to resume normal performance Periodic updates 5 Force Majeure Mismatches Effect of Buyer-related force majeure under LNG sale and purchase agreement Buyer gets reduction in Adjusted Annual Contract Quantity (AACQ) [relief from annual take-or-pay obligation] Seller is relieved from delivery obligation Seller is entitled to remarket LNG to others during period of Buyer force majeure Contract termination rights for extended periods of force majeure 6 Force Majeure Mismatches (continued) Potential mismatch with other key project contracts LNG transportation contracts Usually very limited excuses from payment of charter hire. Standard charter forms provide no relief to charterer for ‘project force majeure’ or political force majeure events. LNG terminalling and gas pipeline transportation contracts Depending on which party is affected by force majeure event, excuse from payment of demand (reservation) charges may not be available, but if facility owner was prevented from performing, business interruption or other available insurance proceeds can be refunded by facility owner to offset demand charges. Natural gas sales contracts Typical U.S. gas market contract forms may not cover upstream LNG production and transportation risks. May also be limited as to duration during which force majeure relief may be sought. Excuse for non-performance due to political events is often covered. 7 Force Majeure Mismatches (continued) Special force majeure issues Extension of LNG contract term by period of force majeure? Automatic vs. optional extension Alignment with other project contracts ‘Force Majeure Restoration Quantity’ obligations Mandatory vs. optional lifting obligation Alignment with other project contracts Impact on downstream take-or-pay / ship or pay obligations Partial force majeure Apportionment of impact among other counterparties Only to the extent possible under other project contracts Goal is to avoid discriminatory treatment 8 Force Majeure Issues in LNG Transportation Contracts Relationship between ‘Exceptions’ and off-hire events in LNG tanker charter parties Scope of traditional charter party exceptions clause No relief to Charterer for project force majeure Capital and operating elements of hire remain payable Some ways that project force majeure has been handled in recent LNG projects Delayed Charterer termination right, with interim creditbacked hire payment obligation Continued payment of capital element of charter hire, with temporary suspension of obligation to pay operating element of charter hire and no contract termination right Right of Charterer to cancel the Charter ‘for convenience’ upon payment of a liquidated termination payment Subcharter rights and related ship owner consents 9 Pricing Mismatches Choice of pricing index Traditional LNG supply contracts use oil-based pricing indexes (JCC, ICP, etc). Newer US-oriented LNG supply contracts are using NYMEX / Henry Hub index Basis differential risk (i.e., pricing difference between index hub location and applicable market area [which in part reflects transportation costs]) may be allocated to either Seller or Buyer Even with the use of a common pricing index, inconsistent contract price ceilings and floors still leave room for potential pricing mismatches between LNG supply contracts and gas marketing contracts 10 Pricing Mismatches (continued) Invoicing and Payment Mismatches Even with the use of a common pricing index, mismatches in the applicable index may occur due to invoicing and payment timing mismatches FOB LNG purchases are usually invoiced at or shortly after loading and can become payable before the cargo is even discharged (on longer voyages) Ex-ship LNG purchases are usually invoiced at or shortly after discharge and can become payable before sendout of the vaporized LNG is completed Invoicing and payment under many gas marketing contracts is set on a monthly basis for delivered quantities Index reference that applies on the date of invoicing in the above settings may be different due to passage of time LNG transportation contracts typically require payment of charter hire monthly in advance, regardless of volume of LNG commodity actually transported 11 Credit Support Mismatches LNG Supply and Transportation Contracts Many ‘traditional’ LNG supply and transportation contracts do not require the Seller / Transporter to maintain credit support in the event of an unexcused Seller / Transporter performance failure Of those LNG supply and transportation contracts that do, typical Seller’s / Transporter’s credit support is in the form of a corporate guarantee and often cover only select performance obligations Often no credit support default provision or credit support replacement obligation US Gas Marketing and Transportation Contracts Fairly detailed credit support obligations applicable to both Seller / Transporter and Buyer / Shipper Fairly easy and quick recourse to available credit support Clear guidelines as to credit support defaults and credit support replacement obligations Fairly ‘light’ triggers to require additional credit support, and contract termination rights if credit support is not promptly forthcoming 12 TYPICAL MISMATCHES BETWEEN LNG SUPPLY CONTRACTS AND US GAS MARKETING AGREEMENTS Question and Answer Session © 2004, CHADBOURNE & PARKE LLP All Rights Reserved