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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 l.jpg

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 l.jpg
Introduction Times they are a changin.’


Ii basic differences between lng and traditional north american gas supplies l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
III. Analysis American Gas Supplies

  • Transportation

  • Scheduling

  • Force Majeure

  • Adequacy of Remedies


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III. Analysis American Gas Supplies

  • Transportation

    1. Traditional gas assumes pipelines will be used.


Iii analysis15 l.jpg
III. Analysis American Gas Supplies

  • Transportation

    • Traditional gas assumes pipelines will be used.

    • LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.


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III. Analysis American Gas Supplies

  • 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 l.jpg
III. Analysis American Gas Supplies

  • Scheduling

    1. Traditional Gas – scheduling flexibility


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III. Analysis American Gas Supplies

  • Scheduling

    • Traditional Gas – scheduling flexibility

    • LNG – limited ability to change scheduling


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III. Analysis American Gas Supplies

C. Force Majeure

  • Increased risks from use of LNG


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III. Analysis American Gas Supplies

C. Force Majeure

  • Increased risks from use of LNG

  • Decreased risks from use of LNG


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III. Analysis American Gas Supplies

C. Force Majeure

  • Increased risks from use of LNG

  • Decreased risks from use of LNG

  • Obligation to replace


Iii analysis22 l.jpg
III. Analysis American Gas Supplies

C. Force Majeure

  • Increased risks from use of LNG

    • Additional governmental regulation from country of export


Iii analysis23 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

C. Force Majeure

2. Decreased risks


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III. Analysis American Gas Supplies

C. Force Majeure

  • Decreased risks

    a. Immune to pipeline breakdowns, ruptures, or malfunctions


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III. Analysis American Gas Supplies

C. Force Majeure

  • Decreased risks

    • Immune to pipeline breakdowns, ruptures, or malfunctions

    • Immune to many weather events affecting traditional supplies


Iii analysis30 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

C. Force Majeure

  • Adequacy of remedies

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


Iii analysis34 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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 l.jpg
III. Analysis American Gas Supplies

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.