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Considerations in Gas Contracts Using LNG Supply. Texas Utility Lawyers Association October 13, 2005 Craig Enochs Jackson Walkter L.L.P. . Introduction Times they are a changin.’ . II. Basic Differences between LNG and traditional North American Gas Supplies. Transportation

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considerations in gas contracts using lng supply

Considerations in Gas Contracts Using LNG Supply

Texas Utility Lawyers Association

October 13, 2005

Craig Enochs

Jackson Walkter L.L.P.

ii basic differences between lng and traditional north american gas supplies
II. Basic Differences between LNG and traditional North American Gas Supplies
  • Transportation
  • Scheduling
  • Force Majeure
  • Remedies
ii basic differences between lng and traditional north american gas supplies4
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.

Regasification

Ship

Liquefaction

ii basic differences between lng and traditional north american gas supplies5
II. Basic Differences between LNG and Traditional North American Gas Supplies

A. Transportation

  • LNG – liquefaction to ship to degasification.
  • Traditional – pipeline
ii basic differences between lng and traditional north american gas supplies6
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
ii basic differences between lng and traditional north american gas supplies7
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – Scheduling based on the timetable for a ship to travel to a gas import facility.
ii basic differences between lng and traditional north american gas supplies8
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – scheduling based on the timetable for a ship to travel to a gas import facility
    • Traditional – scheduling based on pipeline capacity
ii basic differences between lng and traditional north american gas supplies9
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – scheduling based on the timetable for a ship to travel to a gas import facility
    • Traditional – scheduling based on pipeline capacity
  • Force Majeure
ii basic differences between lng and traditional north american gas supplies10
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – scheduling based on the timetable for a ship to travel to a gas import facility
    • Traditional – scheduling based on pipeline capacity
  • Force Majeure
    • Risk calculations are altered, with some risks increased and some decreased
ii basic differences between lng and traditional north american gas supplies11
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – scheduling based on the timetable for a ship to travel to a gas import facility
    • Traditional – scheduling based on pipeline capacity
  • Force Majeure

1. Risk calculations are altered, with some risks increased and some decreased

  • Remedies
ii basic differences between lng and traditional north american gas supplies12
II. Basic Differences between LNG and Traditional North American Gas Supplies
  • Transportation
    • LNG – liquefaction to ship to degasification.
    • Traditional – pipeline
  • Scheduling
    • LNG – scheduling based on the timetable for a ship to travel to a gas import facility
    • Traditional – scheduling based on pipeline capacity
  • Force Majeure

1. Risk calculations are altered, with some risks increased and some decreased

  • Remedies

1. The remedies available if seller fails to deliver may be inadequate

iii analysis
III. Analysis
  • Transportation
  • Scheduling
  • Force Majeure
  • Adequacy of Remedies
iii analysis14
III. Analysis
  • Transportation

1. Traditional gas assumes pipelines will be used.

iii analysis15
III. Analysis
  • Transportation
    • Traditional gas assumes pipelines will be used.
    • LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.
iii analysis16
III. Analysis
  • Transportation
    • Traditional gas assumes pipelines will be used.
    • LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.
    • Mixed bag.
iii analysis17
III. Analysis
  • Scheduling

1. Traditional Gas – scheduling flexibility

iii analysis18
III. Analysis
  • Scheduling
    • Traditional Gas – scheduling flexibility
    • LNG – limited ability to change scheduling
iii analysis19
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
iii analysis20
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
  • Decreased risks from use of LNG
iii analysis21
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
  • Decreased risks from use of LNG
  • Obligation to replace
iii analysis22
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
    • Additional governmental regulation from country of export
iii analysis23
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
    • Additional governmental regulation from country of export
    • Isolation of supply due to concentration of supplies in a single ship
iii analysis24
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
    • Additional governmental regulation from country of export
    • Isolation of supply due to concentration of supplies in a single ship
    • Inability to reroute transportation if the ship becomes unavailable
iii analysis25
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
    • Additional governmental regulation from country of export
    • Isolation of supply due to concentration of supplies in a single ship
    • Inability to reroute transportation if the ship becomes unavailable
    • Uncertainty as to which ship a certain transaction is sourced from
iii analysis26
III. Analysis

C. Force Majeure

  • Increased risks from use of LNG
    • Additional governmental regulation from country of export
    • Isolation of supply due to concentration of supplies in a single ship
    • Inability to reroute transportation if the ship becomes unavailable
    • Uncertainty as to which ship a certain transaction is sourced from
    • Expanded geography
iii analysis27
III. Analysis

C. Force Majeure

2. Decreased risks

iii analysis28
III. Analysis

C. Force Majeure

  • Decreased risks

a. Immune to pipeline breakdowns, ruptures, or malfunctions

iii analysis29
III. Analysis

C. Force Majeure

  • Decreased risks
    • Immune to pipeline breakdowns, ruptures, or malfunctions
    • Immune to many weather events affecting traditional supplies
iii analysis30
III. Analysis

C. Force Majeure

3. Obligations to replace

  • If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure?
iii analysis31
III. Analysis

C. Force Majeure

3. Obligations to replace

  • If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligatedto replacethe volumes cut by the force majeure?
  • NAESB is unclear as to whether the seller is obligated to replace.
iii analysis32
III. Analysis

C. Force Majeure

3. Obligations to replace

  • If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligatedto replacethe volumes cut by the force majeure?
  • NAESB is unclear as to whether the seller is obligated to replace.
  • May be prudent to specify whether the seller has the obligation to replace.
iii analysis33
III. Analysis

C. Force Majeure

  • Adequacy of remedies

a. Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

iii analysis34
III. Analysis

C. Force Majeure

  • Adequacy of remedies
    • Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.
    • LNG – If the delivery point is the tailgate of the regasification facility, it will be appreciably more difficult to obtain alternate supply.
iii analysis35
III. Analysis

C. Force Majeure

  • Adequacy of remedies
    • Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.
    • LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply.
    • Specific performance.
iii analysis36
III. Analysis

C. Force Majeure

  • Adequacy of remedies
    • Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.
    • LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply.
    • Specific performance.

1.) Without specific performance, the buyer may not have an adequate remedy if the LNG seller fails to deliver.

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