LNG TODAY - King & Spalding

LNG TODAY 

Tower of London 

May 4, 2006 

THE LNG “CHAIN” 

NATURAL GAS TO LNG SIMPLIFIED 

Production on 

land/offshore 

Natural Gas 

Pretreatment/ 

liquefaction 

Vaporization 

LNG 

Natural Gas 


Storage 

Storage 





Loading Transportation Unloading 

1

WHAT IS LNG? 

• NOT LPG OR NGL 

• NATURAL GAS THAT HAS BEEN COOLED 

UNTIL IT LIQUEFIES (-160°C) 

• VOLUME IS REDUCED 600 TIMES 

• LIGHTER THAN AIR WHEN VAPORIZED 

• NOT UNDER PRESSURE 

• COLORLESS, ODORLESS 

AND NON-TOXIC 

• STORED COLD 

• CAN BE HEATED AND VAPORIZED AGAIN 

WHEN NEEDED 

LNG IS SIMPLY ANOTHER METHOD TO 

TRANSPORT GAS TO MARKET 

2

Proved Natural Gas Reserves (2004) 

Source: BP 

LNG VERSUS PIPELINE GAS 

• Pipelines have point-to-point rigidity 

• LNG May Allow Better Price 

Competition 

• LNG may be a better option 

than pipeline if: 

– long distance 

– buyer has security of supply 

concerns 

– borders to be crossed; and/or 

– single buyer cannot support 

purchase alone 

3

SAMPLE LNG - PNG COST COMPARISON 

Singapore Study (Oct 2005) 

LNG TRADE CHARACTERISTICS 

• LNG is not a commodity business -- no spot 

market or in transit sales like for oil or LPG 

• “Baseload” sales of LNG are long term: 20-25 

years 

• Long term contracts are take-or-pay 

• LNG projects are capital intensive 

• Fully dedicated shipping often required 

• Project financing depends on players, 

creditworthy buyers, agreements and reliable 

LNG chain 

4

LNG PROJECT HISTORY 

KENAI ALASKA 

STARTED ASIAN LNG TRADE 

LNG Export Projects 

History 

USA, Alaska 

Norway 

(2006) 

Russia (2008) 

Trinidad 

Libya 

Algeria 

Malaysia 

Egypt (2) 

Indonesia (2) 

EG 

UAE 

Brunei 

(2007) Qatar 

Nigeria 

Indonesia – 

Oman 

Tangguh 

(2008) 

Yemen (2008-9) Australia (2) 

5

EXAMPLE PLANNED GREENFIELD 

LNG EXPORT PLANTS 

Egypt 

Russia 

Venezuela 

Nigeria 

Iran 

Indonesia 

Planned 

Peru 

Angola 

Australia 

6

Conventional Example: Darwin LNG (2006) 

Several Import Terminals under Construction 

7

Terminal Technology: 

Italy’s s Adriatic LNG - 1 st Gravity Based Offshore 

Sponsor’s Claim: 

“ 

” 

• Constructing in Spain 

• May, 2008 Start-Up 

(17 Km offshore Italy) 

LNG SHIPPING TRENDS 

• 200 vessel milestone just 

reached; more than 25 on 

order 

• Ahead of supply? 

• Ship size growing (>150) 

• Capital / operating costs 

increasing 

• Effect of China? 

• Shipbuilding / charter 

terms evolving, 

depending on leverage 

8

Types of Terminals: Energy Bridge On-Board 

Regasification Terminal (2005 - 1 st Cargo) 

LNG Tanks 

Traction Winch 

Boiler 

HP Pumps 

Vaporizers 

Turret & Buoy 

LNG FINANCING TRENDS 

• “Current and upcoming 

liquefied natural gas 

projects in the Gulf are 

soaking up huge amounts 

of available global project 

finance liquidity. 

• Last year's Qatargas 2 deal 

broke all project financing 

records. The overall deal, 

totalling $10.65 billion, 

involved 57 major lenders 

an unprecedented number.” 

Qatar: Wednesday, March 22, 2006 

9

Major natural gas trade movements 

BP Statistical Review of World Energy June 2005 

MAJOR TRADE ROUTES 2004 

10

LNG TRENDS 

• LNG supply issues, yet to 

meet LNG demand 

• NOC strength - market entry 

upstream is difficult 

• Liberalization vs. 

Nationalization in Upstream 

• Regasification boom on both 

sides of Atlantic 

• Terminal capacity has been 

taken to support race for 

upstream projects 

11

Value Chain Integration – Ownership Flows 

QP/EM 

gas assets 

BG/Petronas 

gas assets 

Power 

assets 

UF/ENI 

Liquefaction 

Qatar 

(Ras Laffan/ 

Qatargas) 

Liquefaction 

Egypt 

(ELNG) 

Receiving 

terminal 

UF 

South 

Hook 


(UK) 

QP/EM 

Rovigo 


(Italy) 

QP/EM 

Brindisi 


(Italy) 

BG / ? 

Dragon 


(UK) 

BG/ 

Petronas 

Segas 

(Egypt) 

UF/ 

ENI 

Oman 


UF 

Supply 

Side 

Power 

assets 

(Edison) 

Power 

assets 

(Enel) 

Gas 

assets 

Buy 

Side 

#6656 

OTHER LNG TRENDS 

• Some gas markets liberalizing 

(e.g. EU 2 nd Gas Directive) 

• Who will build / use needed 

downstream pipeline / storage? 

• North America / UK a special 

focus due to expected high 

demand 

• However, will high LNG prices 

cause gas demand 

destruction? 

• Threats to LNG - coal, nuclear 

and GTL 

12

NO SHORTAGE OF ISSUES… 

US AND UK GAS SECURITY - THEIR DEPENDENCY ON 

IMPORTS NOW MORE LIKE JAPAN’S? 

13

POLITICS - UPSTREAM 

Larges Gas Reserves (2005) 

Rank Country Proved reserves (TCF) 

1. Russia 1,680 [Sakhalin issues] 

2. Iran 940 [Project stalled?] 

3. Qatar 910 Ras Laffan 

4. Saudi Arabia 235 None 

5. UAE 212 Das Island (at max?) 

6. United States 189 

7. Nigeria 176 NLNG; Brass; OK 

8. Algeria 160 4 Projects (--Skikda) 

9. Venezuela 151 [2 Projects stalled] 

10. Iraq 110 None 

SUPPLIES TAKE TIME TO DEVELOP…. 

EVEN IF PARTIES AGREE UPSTREAM TERMS 

14

CONSTRUCTION COSTS ON THE RISE 

CONSTRUCTION COSTS - NORWAY 

15

LNG PRICING - OPPORTUNITIES FOR TRADERS…. 

IF THEY COULD FIND AVAILABLE LNG 

THE CASE OF LNG 

Contractual Overview 

Memorandum of Understanding 

Memorandum of Understanding 

Investor 

Investor 

Investor/ 

Operator 

Investor/ 

Operator 

Investor 

Investor 

Financing 

Agreement 

EPC LNG Plant 

Contractor Construction 

Agreement 

Feedstock 

Gas Supply 

Agreement 

Lender 

Shareholder 

Agreement 


EXPORTING 

PROJECT 

COMPANY 

State-Owned 

Energy 

Company 

Tech. Serv. 

Agreem. 

PSC / LNG 

Project 

Agreement 

Host 

Government 

Operation & Maintenance 

Contract 

LNG Sales and 

Purchase Contract 

Time charter or 

ship building 

agreements and 

ship operating 

agreements 

Shipping 

Company 

Shareholder 

Agreement 

Host 

Government 

Lender 

Financing 

Agreement 


IMPORTING 

PROJECT 

COMPANY 

Government 

agreements 

Tech. Serv. 

Agreem. 

Fuel Supply 

Agreement 

Receiving 

Terminal 

Construction 

Agreement 

EPC 

Contractor 

Power 

Plant 

Power 

Purchase 

Agreement 

Electricity 

Buyers 

16

King & Spalding 

Key Areas of LNG Expertise 

• In-depth Industry Experience 

Worldwide: 

– Export Terminals and Upstream 

Development 

– Import Terminals 

– LNG and Gas Sales Agreements 

– Shipping Contracts and Maritime 

Issues 

– Construction and Other Major 

Project Contracts 

• US and English Law Capability 

17

THANK YOU 

King & Spalding 

Key Areas of LNG Expertise 

18

Key Issues for LNG Export Developers and Recent 

Developments in LNG Sale and Purchase Agreements 

Kenneth S. Culotta 

The Tower of London 

May 4, 2006 

Focus on the Changing Marketplace 

• Key Issues for LNG Export Developers 

– Evolving Role of State Partner 

– Relevant US Regulatory Issue: LNG/Gas Quality and 

Interchangeability 

• LNG SPAs: the Trend Toward Complexity Continues 

– LNG Pricing and Price Revision 

– Diversion Clauses 

– Relevant EU Regulatory Issue: Profit Sharing Mechanisms 

1

Key Issues for LNG Export Developers: 

Role of State Partner 

• To Netbacks -- and Beyond! 

– Traditional LNG pricing: State Partner as Supply 

Utility 

• 1960s - largely fixed pricing 

• 1970s - linkage to oil export prices (transportation adder) 

• 1980s - increasing resort to price reviews (mostly on “agree 

to agree” basis) 

– Liquid Market Pricing: State Partners Protect 

Revenue Share 

• 1990s/2000s: US market began to revive: upside available 

on a new scale 

• Variable costs shifted to buyers -- or limited 

• Netback pricing increasingly becoming the rule: gas-on-gas 

• Price reviews increasingly “binding” 

How Do You Know if the Market is Liquid? 

“I I know it when I see it!” 

2


Role of State Partner 

• To Netbacks -- and Beyond! 

– Transatlantic Arbitrage Appears: State Partners Yearn for 

Upside 

• Spanish contracts…US deliveries! US contracts … Spanish 

deliveries! 

• Death of destination restrictions? 

• Diversion and profit sharing arrives 

– The Next Generation: State Partners as Market Partners 

• Direct-to-market sales by state partners 

• Terminal capacity by state partners 

• Downstream gas marketing organizations 

– What’s next? 

• Eliminating the middleman? 


U.S. Regulatory Issues: Gas Quality / 

Interchangeability 

• NEWS FLASH! U.S. domestic gas supplies 

declining! 

• EXTRA! EXTRA! Up to 90% of world LNG supplies 

are incompatible with the US pipeline system! 

• AES Ocean Express v. Florida Gas Transmission, 

107 FERC 61,276 (2004) 

– Stems from a complaint by AES regarding FGT’s tariff standards 

– Numerous intervenors on the quality / interchangeability issue 

3


Interchangeability (cont.) 

• Issue: What are the correct 

standards for gas 

composition/quality in FGT’s 

system? 

– By implication, what will US 

pipeline standards be in the 

“LNG Age”? 

– Who pays any costs needed to 

make LNG compatible with US 

pipes and appliances? 

• Conflicting imperatives 



• Positions of the Parties: 

– LNG Suppliers (NGC + Work Group): 

• Uniform national standard needed 

• Each party that benefits from LNG supply 

should pays its costs (LNG suppliers 

already bear plenty!) 

– NGC+ Work Group was formed at 

request of FERC. It recommended: 

» upper Wobbe limit of 1400 

» minimal constituent limits 

– Emphasis on need to persuade 

exporters to consider the US market 

• NGC+ Guidelines would accommodate over 

65% of all world LNG 

4




– FGT: 

• Heat content: 1,025 Btu to 1,110 Btu 

• Wobbe range: 1,340 to 1,396 

• Wobbe fluctuation tolerance: +/- 2% within 6 

minutes 

• Max temperature: 120º F 

• Detailed constituents limits 

– Emphasis on protecting Dry-low-NOx 

turbines (and manufacturer warranties) 




– Utilities (generators): 

• Standards should be conservative, 

accommodate local requirements, costs should 

be borne by upstream pipes or LNG projects 

– Pipelines: 

• Somewhere in-between; emphasis on pipeline 

operational concerns (Washington Gas Light); 

allocation of costs to those who benefit 

– FERC: 

• Supported modified FGT standards w/deferred 

implementation and further empirical testing, 

“socialization” of costs 

5



• Current status: 

• ALJ adopted FGT’s revised position in 11 April 

preliminary decision 

• ALJ determined that potential costs for testing, 

remediation, and repair were speculative, and 

were not appropriately considered in the 

context of the proceeding -- this issue still 

outstanding 

• Briefs on exceptions due in May; if none filed, 

this decision becomes a final agency decision 

– Critical fact: 

• AES v FGT only directly affects FGT’s markets 

(including Alabama-Florida border area); many 

battles yet to be fought 

How Will the Principles of AES v FGT Be 

Applied in Future Cases? 

US East Coast: the 

Holy Grail? 

California - another 

area of marginal 

liquidity 

Florida - not the most 

liquid US market! 

6

Focus on the Changing Marketplace: 

LNG Sales and Purchase Agreements 

• LNG SPAs: The Trend 

Toward Complexity 

Continues 

– LNG pricing 

– Price Revision 

– Diversion Clauses 

LNG SPAs: the Trend Toward Complexity 

Continues… LNG Pricing 

• Index pricing anticipates 

arbitrage 

– For US destinations: monthly 

Henry Hub 

– For UK destinations: National 

Balancing Point 

– For European destinations: 

often still “oil” based, but 

nuanced: 

• E.g., for 85% of quantities, 

monthly average of prices for Gas 

Oil and Fuel Oil; for 15%, tied to 

index for power prices 

• E.g., tied to indexed power pool 

prices in destination market 

7

U.S. Pricing - Netback to Producer 

Hub 

Sales Price 

Index 

NYMEX 

Receiving 

Terminal X 

Transport 

Pipelines 

Shipping 

Liquefaction 

Gas 

Producer 

Hub Price 7.50 

Less Transport Cost Terminal to Hub (0.25) 

Gas Price Out of Terminal 7.25 

Less Terminal Cost (0.35) 

Ex-ship LNG Price 6.95 

Less Shipping Cost (0.50) 

FOB LNG Price 6.45 

Less Liquefaction Cost(s) (1.25) 

Gas Producer Netback 5.20 

LNG SPAs: The Trend Continues… 

LNG Pricing 

• Netback Pricing becoming more complex 

– “Per terminal” pricing (multiple destination terminals 

contemplated) 

• Index-based (gas, oil or mixed fuel) 

• Pool-based (gas sales by buyer and affiliates within defined 

period and at a defined liquid trading point) 

– Annual Election 

• Who gets to make the election? 

• Maximizes opportunity to anticipate annual price trends on a 

per market basis -- or to anticipate one’s market position! 

8



• Netbacks becoming more aggressive 

– Then: obligation to maximize Buyer’s US 

sales: 

• “Buyer shall…diligently seek to maximize the 

net proceeds from its sales of Regasified 

LNG…to ensure that the amount paid to 

Seller…reflects the fair market value to 

Buyer’s…LNG customers.” 

– Now: downstream market “adder” 

• Based on deemed or actual net revenues from 

buyer’s (or its buyers’) gas marketing activities 



• Price Revision: 

– Contract silent? Increasingly rare! 

– Triggered if the index by which price is determined exceeds, or 

falls below, certain thresholds 

– Review triggered if either party believes contract price no longer 

represents a “fair market price” 

– Review triggered if a party believes contract price fails to achieve 

“optimal market value”, taking into account market points 

accessible from relevant terminal 

• Practical Issues: 

– When is the change effective? 

– How far back in time does it apply? 

• Failure to Agree? How to resolve? 

9

LNG SPAs: The Trend Toward 

Complexity Continues…Diversion 

Clauses 

• Why Divert? 

– Increasingly market-sensitive pricing is developing 

– Different market sensitivities drive price differentials, e.g.: 

• Seasonal differentials 

– UK’s NBP and Nymex diverge in winter 

» Winter 2005-6: shortage of gas supplies to UK 

– Summer 2003: Nymex and Spanish power pool prices diverge 

» BP-Repsol netbacks follow 

– Winter 2003-4:Nymex surges 

» Spanish gas diverted to US East Coast markets 

• Short-term spikes 

– Hurricanes Rita and Katrina result in shut-ins 

– March 2003: cold weather froze wells 

– OFO’s 


Diversion Clauses 

• The Lessons of Early Diversions 

– Sellers saw the upside possibilities 

– Sellers also saw the lack of transparency in the 

netback pricing 

– Governments saw what they were missing! 

10



• How do diversion clauses work? Some conceptual 

issues: 

– Title and risk transfer: FOB v DES 

• FOB: free on board at loading port. Implies: 

– buyer ownership and control of cargo 

– buyer responsibility for/control of shipping fleet 

• DES: delivered ex-ship at unloading port or edge of international 

waters. Implies: 

– seller continuing ownership and control of cargo 

– shipper responsibility for/control of shipping fleet 

– Who controls regasification capacity? Market pipeline capacity? 

Downstream gas customer relationships? 



• Underlying economic consideration: cost of the 

use of the “diversion option”: 

• Covering the downstream gas buyer 

• Shipping cost differentials 

• Firm terminal use/payment obligations 

• Unwinding market hedges 

• Conceptual Conclusions 

– The party with most control over cargo, shipping and 

regas capacity is best positioned to manage the risks 

and efficiencies of diversions. 

– The party that does not control diversions seeks 

coverage of its risks associated with diversions. 

11



• Examples: 

– FOB sale: 

• Buyer is best positioned to make diversion decisions 

(controls shipping, regas and downstream marketing risks) 

• Seller’s concern: will the price obtained at the diversion 

delivery point exceed the price that would be obtained at the 

originally intended delivery point? 

– DES sale: 

• Seller controls certain risks relevant to diversion decisions 

(controls shipping) 

• Buyer controls certain risks relevant to diversion decisions 

(controls regas and downstream markets) 

• Buyer’s concern: how will regas and market exposure be 

covered? 



• Mechanics of Diversion Rights 

– Mutual agreement? 

– Automatic upon occurrence of triggering event, e.g., 

pricing divergence from index? 

– One party decides; the other complies? 

– How much discussion of the matter? 

• Destination of Diverted Cargo 

– A specifically designated alternative receiving 

terminal at which buyer has rights? 

– A terminal (specified or not) at which buyer does not 

have rights? 

12


• Mechanics of Typical Diversion Clause 

– Before or after Annual Delivery Program established? 

– One Party exercises right to propose diversion: 

• Other party estimates costs/losses associated with diversion 

• Other party proposes any mitigating techniques to reduce 

such costs: 

– Other party’s recovery of costs may be limited to 

estimate 

– If Buyer diversion: 

• What if diversion sales result in less than originally 

contemplated netback? 

• Seller typically does not accept additional risk/cost 


• Mechanics of Typical Diversion Clause 

– Buyer diversion rights (continued): 

• More common in FOB contracts 

• Also sometimes permitted in DES contracts where: 

– Buyer can show Seller that Seller revenues will be 

enhanced 

– Buyer unable to take at intended receiving terminal 

– Seller unable to deliver to intended receiving terminal 

• Except in the last case, Seller typically doesn’t accept more 

risk or cost than in case of delivery to intended terminal 

13

Diversion Clauses - PSMs 

• Splitting the “Upside”: Contractual and 

Legal Considerations of Profit-Sharing 

Mechanisms (PSMs) 

– Contractual Mechanics: 

• Older contracts: 

– no mention in some (all risk and reward to 

buyer) 

– floor is contract price, with any higher price split 

equally (all risk and some reward to buyer) 

• Newer contracts: 

– Seller keeps all upside, covers buyer costs 

» costs are actual or fixed 

– floor is contract price, with any higher price split 

in agreed ratio after deduction of additional 

costs (some risk and some reward to buyer) 

Diversion Clauses and Profit Sharing 

Mechanisms 

– Destination Restrictions, Diversions, PSMs and the 

EU: What is the Legal Effect of a Diversion Clause? 

• Is a PSM a per se restriction on trade (like destination 

restrictions)? 

– Nigeria case, 2002: “Both the so-called territorial sales 

restrictions and profit splitting mechanism violate 

European Union competition rules.” 

– Is a diversion clause a “destination restriction”? 

– In fact, the Nigerian case apparently did not involve a 

profit-sharing clause. NLNG merely confirmed that “none 

of its existing gas supply contracts contained so-called 

profit splitting mechanisms effecting [sic] the EU markets 

and that it would not introduce these in future contracts.” 

• This Texas lawyer is not giving an opinion! 

14




Mechanisms 

– Legal Effects (EU): 

• Theory: price differentials at different delivery 

points within the market should encourage 

arbitrage 

– Arbitrage should tend to equalize prices across 

the market 

– Competition between supplies should drive 

prices closer to costs 

• This is why destination restrictions are prohibited 

within the EU under Art. 81(1) of the EU Treaty; 

they discourage arbitrage 

• How does this principle apply to splitting of upside 

on sales? 




Mechanisms 


• Theory: behavior which restricts buyers/resellers of 

a commodity from arbitrage in response to market 

signals is anticompetitive 

– If a buyer wants to make a diversion from the 

originally intended destination in order to take 

advantage of market arbitrage, any clause 

which would discourage this behavior is 

anticompetitive 

– Likewise, a levy on resales that discourages 

this behavior is anticompetitive. Does that 

include all PSMs? 

• EU Law? No clear guidance, but….. 

15


• Splitting the “Upside”: Contractual and Legal 

Considerations of Profit-Sharing Mechanisms 


• Article in Spring 2005 Competition Policy Newsletter offers 

compelling reasoning: 

– In context of DES deviations: deviation is a change in the 

contractual relationship that occurs before buyer takes 

title, thus by definition does not interfere with buyer’s 

right to resell. 

– In context of FOB deviations: deviation obliges buyer to 

pay seller a PSM, essentially an obligation triggered by 

the use made of product after delivery to buyer, thus 

clearly a restriction on buyer’s freedom and prima facie a 

violation of Art 81(1) 




Mechanisms 


• Whether PSM violates Art. 81(1) may depend on 

method of clause 

– “Raw” PSM: splits entire difference between, 

on one hand, upstream price between seller 

and buyer and, on other hand, price obtained 

by buyer when reselling at alternative 

destination 

– “Net” PSM: splits incremental profit differential 

between, on one hand, the downstream profit 

expected by buyer at original intended 

destination and, on other hand, profit made at 

alternative destination (i.e., split of profits after 

deduction of incremental costs) 

16

PSMs: “Raw” v “Net” Example 

Alternative Destination: 

Downstream wholesale price = 130 

Costs = 10 

Original Intended Destination: 

Downstream wholesale price = 120 

Costs = 10 

Seller Upstream 

Price to Buyer: 100 

Profit Sharing: 50/50 

DIVERSION 

Raw PSM: at alternative destination, difference 

between final price (130) and initial price (100) 

is 30. Thus: 

• 15 goes to seller 

• 5 goes to buyer (after deduct buyer 

costs of 10) 

If sold at original destination, difference 

between final price (120) and initial price (100) 

is 20. Deducting buyer costs of 10, buyer nets 

10 

Net PSM: at alternative destination: 

• incremental profit is 10 

• 5 goes to seller (half of incremental 

profit) 

• 15 goes to buyer (all original profit, half 

of incremental profit) 


• PSMs may be illegal per se in the EU, but the Nigeria 

LNG case was 2002 and no offense committed (on this 

count, anyway) 

• Other markets are not so restrictive: 

– US competition law applies “rule of reason” test 

– A struggle between market liberalization and security 

of supply? 

• EU policy wonks have rethought the issue as recently as 

Spring 2005 

• The June 2005 Gazprom/E.ON decision presaged the 

next engagement: the Sonatrach LNG contracts 

17

Thank You! 

18

LNG Terminals and the Impact on the 

Downstream Market 

Ned Crady 

Elba, USA berth (opened 2005) 

1 

THE LNG “CHAIN” 

Production 

Field 

Development 

Liquefaction Shipping Regas 

Power 

Generation & 

Gas Distribution 

2

TERMINAL GAS CONTRACTUAL SCHEME 


Transporter 

FOB 

Charter 

Port Liability 

Agreement 

Terminal 

Operator 

Receiving 

Terminal 

Construction 

EPC 

Contractor 

Ex ship Charter 


Seller(s) 


Sales 

Contract 


Buyer 

Terminal Use 

Agreement 

Gas Sales 

Agreement 

Gas 

Buyer(s) 

Fuel Supply 

Agreement 

Power 

Plant 

Gas 

Transporter 

Gas Transportation 

Agreement 

Electricity 

Buyers 

Power 

Purchase 

Agreements 

Pipeline 

Construction 

EPC 

Contractor 

3 

KEY PURCHASE CONTRACT DRIVERS 

• Long term contract (20+ years) 

• Buyer has Take-or-Pay Obligation 

• US$ LNG Sales Price that supports Seller’s upstream 

development, LNG infrastructure, cost of shipping (if exship) 

and return on investments 

• Sufficient annual volume (allowing optimized shipping 

capacity) 

• Creditworthy buyer(s) 

• Assurance of adequate gas reserves 

• Destination restrictions (except in Europe) 

• “Bankable” terms (supports financing of infrastructure) 

• Sound contractual basis governed by NY or English law. 

Disputes resolved by international arbitration. 

4

LINKS IN THE LNG CHAIN 

• Each link must meet its 

contractual obligations 

• Failure of one link of LNG 

chain affects other key 

links 

• Contracts must set forth 

integrated responsibilities 

• Long-term nature 

requires joint planning 

and flexible relationships 

5 

LNG EXPORT “PLAYERS” 

GOVERNMENTAL 

• Sonatrach (Algeria) 

• PERTAMINA (Indonesia) 

• Petronas (Malaysia) 

• Qatar General Petroleum Corp. 

• Abu Dhabi National Oil Corp. 

• Oman Government 

• Brunei Government 

• Nigeria National Petroleum Corp. 

• National Gas Company of Trinidad & Tobago 

• Sirte Oil (Libya) 

• Egypt Government Petroleum Corp. 

• Statoil 

6

LNG EXPORT “PLAYERS” 

NON-GOVERNMENTAL 

• Shell 

• ExxonMobil 

• Mitsubishi 

• JILCO ( Japan) 

• Total 

• BP 

• Mitsui 

• Unocal 

• BG 

• Woodside 

• BHP 

• ChevronTexaco 

• ConocoPhillips 

• Korea LNG 

• Repsol 

• Agip 

• Suez/Tractebel 

• Marubeni 

• Marathon 

• Itochu 

• Nissho Iwai 

• Partex (Oman) 

• Gaz de France 

• Hess 

• Hunt Oil 

7 

LNG IMPORT “PLAYERS” 

• Statoil 

• Cabot 

• BG 

• Gazprom 

• Gaz de France 

• Distrigaz 

• Centrica 

• Total 

• Eni 

• Edison 

• Enagas 

• Gas Natural 

• Endesa 

• Union Fenosa 

• CMS Energy 

• Coral (Shell) 

• Suez 

• BP 

• Botas 

• Petronas 

• Sonatrach 

• Exxon 

• Other National Oil Companies? 

• Trading Companies? 

• Large LDC’s 

• YOUR LOGO HERE 

8

Overview of Typical 

Contract Mismatches 

• Volume & Scheduling Mismatches 

• Force Majeure Issues and Mismatches 

• Pricing Mismatches 

• Credit Support Mismatches 

• Physical Mismatches 

9 

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’ 

– 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 

– LNG boil-off during loading, transportation and 

discharge operations 

10

Volume and Scheduling Mismatches (continued) 

• North American Gas Marketing Contracts 

– Monthly / Daily / Hourly Delivery Send-out / Delivery 

Quantities & Adjustments 

– Monthly “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 Off-Specification Gas (UCC 

Article 2) 

11 

TAKE-OR-PAY MISMATCH 

• Multiple delivery destinations adding to complexity. 

TOP adjustments increasing, such as: 

– buyer’s “Upward” or “Downward” flexibility 

– seller’s diversion rights 

– major scheduled maintenance of facilities or 

terminal “operational constraints” 

– cancel right if buyer unable to schedule for 

delivery 

– if inadequate gas reserves or deliverability 

12

Force Majeure Mismatches 

• Typical Force Majeure Clauses in LNG SPAs 

– Scope of Coverage 

• “Traditional” Force Majeure Events 

• Upstream Reservoir, Production & Liquefaction Facility 

Events 

• Marine Transportation Events 

• Downstream Customer Facility Events 

– Import Terminal and Trunkline 

– Coverage for Downstream Customer Facilities? 

• Construction-Related Events 

• Political Events 

13 

Force Majeure Mismatches (cont’d) 

– North American Natural Gas Sales Contracts 

• Typical U.S. gas market contract forms (ex. 

NAESB) do not cover upstream LNG production 

and transportation risks 

– Language is broadly drafted, but intention of 

drafters was to cover domestic gas field and 

pipeline transportation – related events 

– No mention of LNG Vessels, Terminals, etc. 

• 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 

• LNG Sector is aggressively lobbying NAESB to 

extend Force Majeure to cover LNG Vessels and 

Import Terminals but the Market wants no part of 

upstream liquefaction or well head risk. 

14

Pricing Mismatches 

• Choice of Pricing Index 

– Traditional LNG supply contracts use oil-based pricing 

indexes (JCC, ICP, etc). 

– Newer North America-oriented LNG supply contracts 

are using NYMEX / Henry Hub index 

– Basis differential risk may be allocated to either Seller 

or Buyer or split 

• LNG Sellers frequently view basis risk as being 

Buyer’s problem 

• Depending upon the market, timing and amount of 

LNG delivered may itself have an impact on local 

basis differential 

15 

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 

16

Pricing Mismatches (continued) 

• 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 vessel timecharter contracts typically require 

payment of charter hire monthly in advance, 

regardless of volume of LNG commodity actually 

transported 

• LNG vessel voyage charters typically require 

payment of freight rate upon completion of voyage / 

discharge of cargo 

17 

Credit Support Mismatches 

• LNG Supply and Transportation Contracts 

– Many ‘traditional’ LNG supply and transportation 

contracts do not require the Seller / Transporter to 

provide 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 

– Often no credit support default provision or credit 

support replacement obligation 

18

Credit Support Mismatches (continued) 

• North American Gas Marketing & 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 

19 

Physical Impact 

• Increased Supply of Natural Gas 

• Increased Need for Storage 

20

Proposed European LNG Import Terminals 

21 

Proposed European LNG Import Terminals (cont’d) 

22

Proposed European LNG Import Terminals (cont’d) 

23 

Regional LNG Imports at New Terminals, 

2010, 2015, 2020, and 2025 (billion cubic feet) 

2010 

2015 

2020 

2025 

WA/OR 

Mountain 

West 

North 

Central 

2008 

East 

North 

Central 

114 128 

New 

England (2020) 

New England 

Mid 

256 

Atlantic 

128 

(2020) 

Middle Atlantic 

CA 

AZ/NM 

West 

South 

Central 

1086 

1551 

East 

South 

Central 

930 930 

807 

South 

Atlantic 

188 

413 

(2016) 

South Atlantic 

183183183 244 Florida 

293 293 293 

(2007) 

Mexico into US 

615 

310 

FL 

146 

(2010) 

(20xx) – Start year of first new terminal 

(2010) 

(2006) East South Central 

West South Central 

Annual Energy Outlook 2005 

24

But What does LNG Have to Do With Natural Gas 

Storage? 

• LNG will go into storage pending alignment of credit 

worthy, baseload gas purchasers who can take 100% of 

terminal send out capacity 

• LNG will require cover gas in the event of: 

• production and liquefaction outages/shipping delays 

• Force Majeure, quality issues 

• Make up LNG will in turn be vaporized and swapped into 

storage to replace cover gas 

• Natural Gas Storage Facilities 

• are cheaper than another LNG tank 

• provide more pipeline alternatives (hub services) 

25 

Underground Gas Storage Facilities in Europe (end of 1999) 

26

Proposed New European Storage Facilities (cont’d) 

27 

Proposed New European Storage Facilities 

28

29 

Source: FERC Website (04/27/06) 

30

Source: FERC Website (04/27/06) 

31 

Not All Storage is Equal: 

Pad Gas Requirements and 

Cycling Capability Differ 

Source: FERC Staff Report (9/30/2004) 

32


Development Costs Vary 

Source: FERC Staff Report (9/30/2004) 

33 


LNG Storage Versus Salt Storage 

34

THANK YOU! 

Ned Crady 

Partner, Global Transactions 

(w) 713-751-3203 

NCrady@KSLaw.com 

35

STRUCTURING A 

BANKABLE 

LNG PROJECT 

SCOTT SAMUEL AND DANIEL R. ROGERS 

The Tower of London 

May 4, 2006 

LNG PROJECT FINANCING 

2 

1

OVERVIEW OF PRESENTATION 

• Import Terminal Financing Needs 

• LNG Gas Supply Chain 

• Possible LNG Structures 

• Project Structuring Fundamentals 

• Some Common Impediments to Project 

Financing LNG Facilities 

3 

IMPORT TERMINAL FINANCING NEEDS 

4 

2

IMPORT TERMINAL FINANCING NEEDS 

• Current European landscape: 

– Over 25 LNG import terminal projects planned or announced for 

Europe 

– 6-10 new LNG import terminals likely to be developed in 

Europe/Mediterranean basin 

– Capital costs likely to be similar 

• Current U.S. landscape: 

– Over 50 LNG import terminal projects planned or announced for US 

– Approximately 6-10 new LNG import terminals predicted for US by 

2010 

– Estimated capital cost per facility is $500 to $750 million 

– Expansions underway at existing terminals 

• Result: Approx. $6 – 15 billion in capital needed for import terminal 

infrastructure (excluding new pipelines) 

5 

LNG Gas Supply Chain 

Upstream Gas Field 

Pipeline 

Liquefaction Plant 

LNG Tankers 

Import Terminal 

6 

3

Possible LNG Structures 

• Import Terminals 

• Upstream development and liquefaction plant 

• LNG Tankers 

7 

UNIFIED (INTEGRATED) FINANCING 

STRUCTURE 

Government 

Production Sharing Agreement 

Upstream 

Gas Producers 

On-loans 

Financiers 

Loan Agreement 

Downstream 


Company 

Shareholders 

Ownership 

Financiers’ security package 

8 

4

SALE AND PURCHASE STRUCTURE 

Government 


Upstream 

Gas Producers 

GAS 

Gas Sales Agreement 

Financiers 



Downstream 


Company 

Shareholders 

Ownership 

Offtakers 

9 

TOLLING STRUCTURE 

Government 


Upstream 

Gas Producers 

LNG Sale and Purchase 

Agreements 

Offtakers 

GAS 

Tolling Agreement 


Financiers 


Downstream 

LNG Company 

Shareholders 

Ownership 

10 

5

SALE AND PURCHASE STRUCTURE 

Government 


Financiers 


Upstream 

Gas Producers 

GAS 

Gas Sales Agreement 

Financiers 


Downstream 


Shareholders 


Ownership 

Offtakers 

11 

UNIFIED (INTEGRATED) FINANCING 

STRUCTURE 

Government 


Upstream 

Gas Producers 

On-loans 

Financiers 


Downstream 


Shareholders 

Financiers’ security package 

12 

6

KEY CONSIDERATIONS 

• Structuring for expansions 

– Same or new entity for expansion? 

– Project-on-project financing issues 

– Collateral allocation & priority issues 

– Shared facilities 

– Liability insulation 

– Effects on available financing sources 

13 

KEY CONSIDERATIONS 

• Contract chain risk allocation and mitigation 

– Structural and contract mitigants 

– Contract alignment 

– Focus on the “revenue contracts” 

• Off-taker / capacityholder credit is critical 

– Credit “pressure points” are a big factor in level of lender 

recourse to sponsors 

14 

7

PROJECT FINANCING IMPEDIMENTS 

15 

SOME IMPEDIMENTS TO FINANCING 

• Common financing impediments 

– Sponsor credit and performance concerns 

– Contract price / volume risk volatility 

– Construction and completion risks 

– Misalignment of key revenue contract terms 

• Term mismatches 

• Unhedged pricing index mismatches 

• Volume & scheduling mismatches 

• Force majeure mismatches 

• Quality specification mismatches 

16 

8

SOME IMPEDIMENTS TO FINANCING 

(continued) 

• Some more common financing impediments 

– Contract default and damage / remedy mismatches 

– Payment timing and currency mismatches 

– Credit support mismatches 

– Conditions precedent (CP) mismatches 

• How many of these impediments are addressed will impact 

on available financing sources and terms 

17 

POLITICAL RISK MITIGANTS 

FOR LNG PROJECTS 

• External 

– Investment protection treaties 

– Private political risk insurance 

– Political risk insurance from multilateral and export 

credit agencies 

• Internal 

– Legislative protection 

– Stabilisation clauses 

– Externalisation of governing law and venue for dispute 

resolution 

18 

9

PARTING COMMENTS 

• Parting comments: 

– Up-front project structuring and risk analysis 

is key 

– Keep risk-sharing expectations realistic 

– Keep execution timing expectations realistic 

– Keep financing expectations realistic 

– Look at all financing alternatives, including 

the less traditional financing sources and 

structures 

19 

Thank You! 

20 

10

LNG IMPORT TERMINALS: 

CHALLENGES AND OPPORTUNITIES 

Philip Weems & Susan Beck 

London 

4 May 2006 

THE “LNG CHAIN” 

AND COST DISTRIBUTION 

Field 

Development 

10-20% 

Liquefaction 

25-35% 

Shipping 

15-25% 

Receiving 

Terminal 

5-15% 

Power 

Generation & 


25-35% 

1

IMPORT STATISTICS 2004 

51 EXISTING ONSHORE TERMINALS (+ 1 

OFFSHORE) (14 COUNTRIES) 

United Kingdom 1 

Belgium 1 

France 2 

Turkey 2 

Japan 25 

United States 5* 

Portugal 1 

Korea 4 

Puerto Rico and DR 2 

Spain 4 

Italy 1 

Greece 1 

India 2 

Taiwan 1 

• Terminals opened during 2004-2005: Japan, U.S., India, and UK 

2

IMPORT TERMINALS 

Elba, USA berth (opened 2005) 

40+ PROPOSED LNG TERMINALS 

Poland 

Canada 

Netherlands 

Romania 

United States 

United Kingdom 

Germany 

France 

Cyprus 

China 

Taiwan 

Thailand 

Mexico 

Spain 

El Salvador 

Italy 

Brazil 

India 

Singapore 

Chile 

Indonesia 

* Terminals under construction: Mexico, China, US, UK, etc. 

New Zealand 

3

PROPOSED TERMINALS 

FREEPORT LNG, TEXAS 

4

PROPOSED TERMINALS: 

LARGE ONSHORE IN LOUISIANA 

(CHENIERE) 

PROPOSED TERMINALS 

FREEPORT LNG, TEXAS 

5

OFFSHORE LNG TECHNOLOGY 

OPTIONS 

• Regasification vessels (e.g. “Energy 

Bridge”) 

– typical LNG carrier modified to enable 

vessel to discharge regasified LNG into 

a subsea pipeline, via an internal turret 

connected to offshore mooring buoy 

• Platform based import terminals - 

– converting existing oil and gas platform 

structures to accommodate LNG 

deliveries, along with other berthing 

OFFSHORE LNG TECHNOLOGY 

OPTIONS 

• Offshore gravity based structures (GBS) 

– - concrete or steel caissons located on the 

seabed. Self-supporting infrastructure (e.g. 

operation, utilities and power generation) 

• Floating storage regas units (FSRU) - 

– purpose built, permanently moored structure 

with LNG vessels shuttling between loading 

port and import terminal 

6

TYPES OF PROPOSED TERMINALS: 

ENERGY BRIDGE ON-BOARD 

REGASIFICATION TERMINAL 

LNG Tanks 

Traction Winch 

Boiler 

HP Pumps 

Vaporizers 

Turret & Buoy 


OFFSHORE MASSACHUSETTS (HOEGH( 

- 

SUEZ) 

7

TYPES OF PROPOSED TERMINALS: BHP 

BILLITON’S 

FLOATING OFFSHORE STORAGE AND 

UNLOADING VESSEL 


HILOAD OFFSHORE 

8

LNG SAFETY ISSUES 

LNG SAFETY ISSUES 

• At first, some critics claimed LNG is “Frozen 

Fire” - a “lethal gamble” capable of destroying 

an entire city 

9

LOCAL ISSUES 

EXAMPLE OF ANTI-LNG LOBBY 

• http://www.timrileylaw.com/LNG.htm 


DANGER To our Communities 

ALERT . . . 

“LNG has tried locating in the City of Oxnard, 

California, before, so we already know how massive its 

destruction can be. In 1977, Oxnard opposed an LNG 

project after the city’s Environmental Impact Report 

(EIR) showed up to 70,000 casualties resulting from an 

offshore LNG tanker accident.” 

10

ANTI-LNG LOBBY 

(www.lngwatch.com) 

LNG IS POTENTIALLY DANGEROUS Fiery LNG disasters in Algeria (2004) and 

Cleveland (1944) are real examples of the potential for death and injury in the vicinity of 

LNG facilities. No telling what a major storm or tsunami will do to the planned floating 

terminal, it will be the first of its kind in the world. 

THREAT TO OUR COAST Importing LNG would require a large industrial facility off the 

coast and a pipeline to carry the gas to shore. Coastal LNG terminals will lead to the 

continued industrialization of an already crowded coastline. 

A DANGER TO OUR COMMUNITIES Maryland began importing LNG three years ago, 

where the gas is eroding pipeline seals, causing dangerous leaks and $144 million in 

damage. Now Maryland ratepayers are being asked to foot the bill to fix the damage. 

A TERRORIST TARGET Anti-terrorist experts, like former national security advisor 

Richard Clarke, say LNG tankers and facilities are major terrorist targets. 

WE DON'T NEED IT The US Department of Energy says we have adequate domestic 

natural gas supplies to meet current demand for at least the next 60 years. 

IT CONTRIBUTES TO GLOBAL WARMING Because of processing and transportation, 

LNG produces 20% to 40% more greenhouse gases than domestic natural gas. California 

should invest in clean, renewable energy — not more polluting, expensive fossil fuels. 

LNG IS SAFE AND RELIABLE 

• But, to date: 

– 45,000+ LNG cargoes 

– almost 100 million 

miles 

with no fatalities or 

serious incidents 

• 40+ years of experience 

• Proven technical designs 

and high standards of 

operation and 

maintenance (supported 

by SIGTTO) 

Fujian, China 

11

LESSONS FROM HISTORY 

• Two examples 

show major impacts 

on LNG trade 

caused by approval 

failures 

• 1970s and 1980s in 

California 

• 1990s in Italy 

TERMINAL REJECTION - CALIFORNIA 

• 1973 Indonesian contract to supply Western LNG 

terminal sites near Los Angeles 

• Environmental / safety / economic reviews led to 

differing views from State/Federal agencies 

• 1977 California LNG Terminal Siting Act gave 

authority to only one State agency 

• 82 sites found, but 81 eliminated for military, 

population, weather or other reasons 

• U.S. court rejected last site for seismic reasons 

• By 1981 WLNG abandoned the proposal, but 

Indonesia found alternative market in Japan 

• Fortunately, no contractual dispute occurred 

12

TERMINAL APPROVAL - ITALY 

• Nigerian contract to supply ENEL Tuscany terminal 

• 1996 ENEL canceled contract claiming force majeure 

due to withdrawal of approval by newly-elected 

“greener” Italian government 

• Nigeria filed $13 billion claim, reportedly largest ever 

brought under English law 

• Case settled, with settlement calling for shipment of 

LNG to France in exchange for Russian gas diverted 

by French buyers to Italy 

AGREEMENTS FOR LNG TERMINAL 

SERVICES: 

13

LNG TERMINAL DEVELOPMENT 

• Historically LNG terminals have been developed 

by and for the end-user 

• Third party access to terminal capacity either not 

relevant or not permitted 

• If available, third party access allowed where 

user did not compete in downstream gas market 

with terminal owner 

A MULTITUDE OF NAMES…. 

• Terminal Use Agreement (“TUA”) 

• Terminal Services Agreement 

• Firm Service Agreement 

• Tolling Services Agreement 

• Firm Storage Services Agreement 

• LNG Terminalling Capacity Subscription Agreement 

• Specific Terms Agreement 

• Throughput Agreement 

14

ADVANTAGES/DISADVANTAGES OF 

LNG TERMINAL MODELS 

100% Owner - 100% User Terminal 

Maximum operating flexibility within 

terminal’s capacity to co-ordinate 

LNG sales volumes and deliveries 

Flexibility for expansions 

BUT 

• Responsibility for 100% funding 

• No third party user to mitigate financial risk 

• Operating costs may be very expensive 

100% THIRD PARTY USER TERMINAL 

• Third party user’s financial risk only linked to its 

contracted capacity 

• Its capacity portfolio should be easier to manage - will 

only contract for what it needs at one or more LNG 

terminals 

• Should be able to agree favourable terms for its use of 

capacity if too much terminal capacity in the market 

BUT 

• Competing with capacity with other users 

• Full access to ship berthing facilities at LNG terminal 

may be difficult 

• Commercial viability of LNG terminal may be dependent 

on financial creditworthiness of a number of unrelated 

companies 

15

MIXED OWNER - THIRD PARTY USE 

• Owner’s do not have 100% of the financial risk - terminal 

use charge should reduce owner’s operating costs 

• Third party user’s financial risk likely to be limited to its 

contracted capacity - no up front capital payments. 

• Third party can obtain comfort from owner’s 

creditworthiness. 

• No one entity will have complete flexibility regarding 

capacity use 

• Reduced flexibility if expansions are needed 

• Reduced access to ship berthing facilities 

TREND IN EUROPE AND US IS FOR SEPARATE 

TERMINAL OWNER TO PROVIDE TERMINAL 

SERVICES TO MULTIPLE PARTIES 

Transporter 

Terminal 

Owner 

Ex Ship 

FOB 

Terminal Use Agreement(s) 


Seller(s) 

LNG Sales 

Contract 


Buyer 

Gas Sales 

Agreement 

Gas 

Buyer(s) 

Sole Use Terminal 

16

TYPICAL DEAL STRUCTURE 

• Fee structure supporting financing (e.g. need rated 

customer), with Terminal not exposed to volume / price risk 

• Typical service fee components: 

– Reservation – fixed, with portion perhaps tied to index 

– Operating Costs – fixed or actual 

– Retainage for Fuel – fixed or actual (with cap?) 

• Few fee adjustments if services unavailable (i.e. “hell or 

high water” basis) 

• “Use-it-or-lose it” basis (e.g. Customer bears upstream risk) 

• Termination right if extended FM or services unavailability 

• Terminal Owner enjoys limited liability 

• 20+ year term, with possible extension rights and options 

TUA BASICS 

• Regulations may affect approach 

• Traditional TUA services: 

– Vessel berthing and unloading 

– LNG storage 

– Regasification of LNG 

– Transportation to redelivery point 

(with redelivery of gas on a 

commingled stream basis) 

• Example models: 

–3 rd party usage only 

– Mixed 3 rd party / terminal owner 

usage 

17

SOME KEY TUA ISSUES 

• Scheduling of vessel berthing and 

gas offtake 

– especially if owner is also a 

terminal user 

• Inventory management (including 

effects of using larger vessels) 

• Assignment and subletting of 

services (especially re financing) 

• Remedies for: 

– owner’s failure to provide 

services; and / or 

– damage to LNG terminal 

SCHEDULING – A FOCUS OF DISCUSSION 

• Scheduling is a major customer 

focus 

– though almost every terminal has 

multiple LNG suppliers 

• Grant one customer a priority over 

other customers? Examples: 

– Establishing or changing LNG 

berthing schedule 

– Force majeure or other terminal 

shutdown 

• If a priority given, how determined? 

– Contracted services 

– Duration of TUA 

18

RECENT EUROPEAN TUAs 

1. Fluxys LNG: (Belgium) 

‣ Qatar / Exxon (2004) 

‣ Distrigas (2004) 

2. Dragon LNG: (UK) 

‣ BG (2004) 

‣ Petronas (2004) 

3. Grain LNG (National Grid Transco): (UK) 

‣ BP / Sonatrach (2004) 

‣ Gaz de France (2005) 

‣ Centrica plc (2005) 

RECENT NORTH AMERICAN TUAs 

4. Sabine Pass [Cheniere]: (Louisiana) 

‣ Total (2004) 

‣ Chevron (2004) 

5. Freeport LNG: (Texas) 

‣ Dow Chemical (2004) 

‣ ConocoPhillips (2004) 

‣ Mitsubishi (2005) 

6. Energía Costa Azul: (Mexico) 

‣ Shell (2004) 

‣ Sempra (2004) 

7. Sempra - Cameron (Louisiana) - ENI (2005) 

19

ACCESS TO LNG TERMINALS 

IN EUROPE 

SECOND GAS DIRECTIVE 

• Second Gas Directive recognised importance of 

effective national regulation in guaranteeing 

non-discriminatory access 

• Regulator’s competence to fix/approve tariffs (or 

the calculation methodology) for access to LNG 

facilities 

• Tariffs should be published to avoid uncertainty 

and costly disputes 


IN EUROPE 


European Commission introduced number of 

directives designed to facilitate competition and 

create a single gas market in Europe 

From 1 st July 2004 Second Gas Directive 

(2003/55/EC) requires open access to gas 

storage, transmission and distribution (this 

includes LNG terminals) 

Access should be “Non-discriminatory transparent 

and fairly priced” 

20


IN EUROPE 

Exemptions from third party access provisions may be 

given for new gas infrastructure if: 

• the investment enhances competition in gas supply and 

security of gas supply 

• risk attached to investment is such that there would be 

no investment without exemption 

• legal entity owning infrastructure separate from system 

operator 

• charges levied on infrastructure users 

• exemption not detrimental to competition or effective 

functioning of internal gas market or applicable regulated 

system 

LNG TERMINAL ACCESS IN BRITAIN 


OFGEM (Office for Gas and Electricity Markets) 

is the regulator for Britain’s gas and electricity 

industries. 

OFGEM’s role is to promote effective competition 

and to regulate the gas and electricity industries 

to ensure adequate investment in the networks. 

OFGEM’s responsibility to grant exemptions on a 

case by case basis pursuant to Gas (Third Party 

Access) Regulations 2004. 

21



• Third party exemption may cover all or part of the 

new infrastructure. 

• Exemption may be subject to conditions relating to 

term of exemption depending on: 

- duration of contracts 

- additional capacity to be built/modification of 

existing capacity 

- term of the project 

- national circumstances 

• OFGEM may decide upon the rules and 

mechanisms for managing and allocating capacity 


Ofgem obliged to notify Commission of all relevant 

information regarding exemption decision. 

- Within 2 months of notification, Commission may 

request amendment/ withdrawal of decision to grant 

exemption. 

- Commission has veto rights. 

In Britain, 3 LNG terminals have been granted an 

exemption - Grain LNG, Dragon LNG and South Hook 

LNG. 

22

CONCLUSION 

• US / European terminals are 

offering services to their sponsor 

companies and 3 rd parties 

• Experience shows TUAs can raise 

challenging issues; in particular, 

if: 

– multiple customers are users, 

especially if they have differing 

rights of service; or 

– regulatory regime overlooks 

unique needs of the LNG trade 

• Contract form continues to evolve 

as we learn from more experience 

23

Islamic Finance 

An additional source of finance in 

LNG Projects 

May 4, 2006 

Jawad I. Ali 

Contents 

• Islamic Finance at a Glance 

• Islamic Finance tranches in Gas and LNG Projects 

• Islamic Financing structures utilized in LNG projects 

• The main difference between Conventional Finance and 

Islamic Finance 

• Enforceability of Islamic Finance documents and 

governing law issues 

• The reasons for the late arrival of Islamic tranches in 

Gas & LNG project financing & new trends 

1 

1

Islamic Finance at a glance 

What is Islamic Finance? 

• Islamic finance is any financing that is compliant with the 

principles of Islamic Shari’ah. 

2 

Islamic Finance at a glance.. (cont’d) 

What is Islamic Shari’ah? 

• The principles of Islamic Shari’ah derive from five 

sources: 

‣ Qur’an -- the holy book revered by Muslims; 

‣ Sunna -- the practice and traditions of the prophet 

Muhammad; 

3 

2


‣ Qiyas -- a comparison, used to make a judgement on 

issues which have no clear-cut ruling in the Qur’an or the 

Sunna, by consideration of similar issues which do have 

clear ruling; 

‣ Ijtehad -- the diligent judgement of the scholars through 

reasoning and logic; and 

‣ Ijmaa -- a consensus or agreement used for issues which 

require Ijtehad. 

4 


Who decides that a financing structure and the 

documentation effecting the same are Shari’ahcompliant? 

• The Shari’ah board or Supervisory committee 

• Review of the structure and documentation 

• Issuance of the fatwa 

• Fatwa’s (persuasive not binding). 

5 

3


Who populates the Shari’ah boards/supervisory 

committees? 

• Religious scholars, lawyers, economists and others. 

• A Shari’ah board/supervisory committee is more akin to 

a compliance officer of a banking institution as opposed 

to member of corporate board. 

6 

Islamic finance tranches in Gas and LNG 

Projects 

• The Dolphin Gas Project -- Closed September 2005 

‣ Project description: Gas Extraction and processing in 

Qatar and the construction of a pipeline to the UAE. 

‣ Financing: $3.45 billion, $1.0 billion of which was financed 

on a Shari’ah-compliant basis utilizing an Istisna’a-Ijara 

financing structure. 

‣ Tenor: 4 years 

‣ Islamic Mandated lead arrangers: ABN Amro, BNP 

Paribas, Citibank, Dubai Islamic Bank and Gulf 

Investment Bank. 

7 

4

Islamic finance tranches in LNG Projects 

• Qatargas II LNG -- Closed December 2004 

‣ Project Description: Upstream infrastructure 

development, including offshore gas platforms and a twotrain 

onshore LNG processing facility. 

‣ Financing: $4.5 billion, $530 million of which was financed 

on a Shari’ah-compliant basis (Istisna’a-Ijara financing). 

‣ Tenor: 15 years 

‣ Islamic Mandated lead arrangers: Dubai Islamic Bank, 

Kuwait Finance House, BNP Paribas, Gulf International 

Bank and HSBC. 

8 

Islamic financing structures utilized in 

Gas and LNG projects 

• Istisna’a – the word Istisna’a means manufacturing/ 

building. An Istisna’a contract is used to finance the 

acquisition of a built to order project or asset, where the 

acquisition price of the underlying project or asset is 

paid in installments pursuant to an agreed schedule and 

milestones. 

9 

5


Gas and LNG projects 

• Istisna’a contracts are frequently used to finance the 

construction of projects, ship and aircraft building and 

other similar assets. 

• Ijara – the word Ijara means lease. In an Ijara 

transaction, the lessor (bank) would purchase and lease 

the underlying asset to the prospective lessee 

(borrower), for an agreed term and rent. 

10 


LNG projects (cont’d) 

• An Ijara is usually coupled with a call and put options. 

• Unlike a conventional finance lease, in an Ijara 

transaction, the lessor is responsible for the structural 

maintenance and insurance of the underlying asset and 

will not be entitled to receive any rent after the 

termination of the lease. 

• Ijara structures are frequently used to finance the 

acquisition of various types of projects (including LNG) 

and equipment. 

11 

6


project financings (cont’d) 

• Murabaha – a bank funds the purchase of a given asset 

by charging a mark-up for the goods. 

• Unlike a conventional financing, rather than advance the 

money to the prospective borrower (the party seeking 

financing on a Shari’ah compliant basis), the bank would 

buy the goods from a third party and sell those goods on 

to the party seeking financing for a pre-agreed price on 

a deferred payment basis. 

12 


LNG projects (cont’d) 

• Murabahas are frequently used to finance the 

acquisition of various commodities and assets. 

Murabaha structures have also been utilized to provide 

working capital facilities to Shari’ah compliant 

companies. 

13 

7

Main differences between conventional 

finance and Islamic finance 

• Riba -- Interest 

• Gharar -- Uncertainty or speculation 

• Prohibited activities -- conventional banking, insurance, 

hotels, gambling and entertainment, liquor, tobacco, 

offensive weapons and arms related sectors, 

manufacturing, processing of pork and related products 

14 

Reasons for the late arrival of Islamic 

Finance tranches in Gas and LNG 

Projects 

• Small balance sheet of the Gulf based Islamic banks 

• Mismatch between assets and liabilities (short tenor) 

• slim margins 

• inter-creditor issues 

15 

8

New Trends 

• Conventional Banks leading Islamic Tranches 

(eliminating the mismatch issue) 

• New Islamic Banks being set up (bigger balance sheets) 

• Hybridising Istisna’a and Ijara financing instruments to 

achieve longer tenors 

• Pragmatic Shari’ah-compliant solutions for inter-creditor 

issues 

16 

Enforceability of Islamic Finance 

documents and governing law issues 

• The principles of Islamic Shari’ah are not a codified set 

of rules which one can point out to with any degree of 

certainty. 

• Therefore, it is not advisable to subject the Islamic 

finance documents to Shari'ah law. Shamil Bank of 

Bahrain v Beximco Pharmaceuticals Ltd. and others 

17 

9

LNG TRANSPORTATION: 

REVIEW OF RECENT TRENDS IN SHIPPING PROJECTS 

AND CONTRACTS 

Philip Weems and Daniel Rogers 

Tower of London 

May 4, 2006 

• Overview of LNG Vessel Types 

• LNG Shipping Costs 

• LNG Fleet Size, Costs and 

Future Capital Requirements 

• LNG Vessel Construction 

• LNG Transportation Contract 

Types and Issues 

• LNG Tanker Time Charter 

Parties 

• Maritime Liabilities and 

Limitations 

Discussion Outline 

1

Basic LNG Vessel Types 

Spherical (Moss-Rosenberg Design) Tanker 

2

Membrane Containment System Tanker 

What’s Driving the Need for Innovation in LNG 

Shipping? 

“LNG Shipping still remains the most 

important element in the [LNG] cost 

structure.” 

H.E. Abdullah bin Hamad Al Attiyah 

Second Deputy Prime Minister, Minister of Energy and Industry, Qatar 

June 2005 

3

Cost Distribution 

Along the LNG Chain 

Field 

Development 

10-20% 

Liquefaction 

25-35% 

Shipping 

15-25% 

Receiving 

Terminal 

5-15% Power 

Generation & 


25-35% 

Current & Anticipated LNG Fleet Size 

• Approx. 198-202 LNG vessels currently in service 

– Ages range from

LNG Fleet Capital Needs 

• LNG vessel capital costs: 

– “Average” vessel (145,000 - 160,000 cbm) cost is 

approx. US$215-230MM 

– New 210,000-216,000 cbm LNG ships expected to 

cost approx. US$275-280MM 

– Next-generation LNG “superships” (260,000 cbm+) 

expected to cost in the US$285-300MM range 

• Total capital needs for LNG vessel construction over the 

next 5 years: US$15-20 billion 

• Total capital needs by 2020 estimated at US$40 billion 

LNG Vessel Construction 

• Typical LNG export project 

requires up to 8 newbuild 

vessels 

• Only about 15 shipyards 

worldwide with experience and 

capabilities to construct LNG 

vessels 

• Most of the newbuild contracts 

will go to the 6 major Japanese 

and Korean yards 

5

LNG Vessel Construction (cont’d.) 

• Newbuilds are being tendered for competitive bid with increasing 

frequency 

• Typical newbuild program takes 36 months, but 4 year construction 

periods now reportedly occurring due to shipyard capacity 

shortages 

• Usually built under a lump-sum “turnkey” construction contract, 

but steel price escalators and foreign exchange adjustments 

becoming more prominent 

• Building contracts require 5-6 installment payments, but title to 

vessel does not transfer to owner / buyer until final delivery and 

acceptance; as such shipbuilder’s refund guarantee is critical to 

vessel construction financing 

The New Trend: “Super-Size Size Me” 

6

LNG Transportation Contract Types 

and Issues 

Types of Transportation Agreements 

• Contract of Affreightment (COA) 

– BTU quantity carried between specific points by 

various ships in owner’s fleet 

• Typically only requirements as to general vessel 

size and characteristics 

• Choice of specific vessel(s) used for each 

voyage left to owner 

– Freight (often on a per-unit basis) paid to vessel 

owner on a periodic basis 

– Shipowner force majeure only if an event impacts 

the designated vessel for the particular voyage 

7

Types of Transportation Agreements (cont’d.) 

• Bareboat (or Demise) Charter of Named Vessel 

– True owner (“head owner”) is merely a financial 

owner 

– Bareboat charterer effectively becomes the 

“owner” for purposes of operation, control and 

liabilities 

– Bareboat charterer is required to crew, insure, 

operate and maintain the vessel in order to place 

it into service 

– Bareboat hire is essentially paid on a “hell or high 

water” basis 

Types of Transportation Agreements (cont’d.) 

• Time Charter of Named Vessel 

– Essentially a service contract: owner retains control and is 

responsible for crewing, operation and maintenance; time 

charterer instructs vessel where to load and discharge, and 

speed at which to proceed 

– Hire is usually paid on a hell-or-high water basis, monthly in 

advance 

• Capital cost element 

• Operating cost element 

– Voyage costs (port charges, bunker fuel, etc.) paid directly by 

charterer 

– Project or LNG SPA-related force majeure typically does not 

excuse charterer from payment 

8

Types of Transportation Contracts (cont’d.) 

• Voyage Charter of Named Vessel 

– Usually a single voyage arrangement, but can 

provide for consecutive voyages 

– BTU quantity carried between specific points by 

specific ship 

– Similar to a time charter in that owner retains control 

and is responsible for crewing, operation and 

maintenance; voyage charter contract specifies 

where vessel is to load and discharge 

– Freight (often on a lump-sum basis) paid to vessel 

owner upon completion of voyage and delivery of 

cargo; ballast voyage is for owner’s account 

Vessel Ownership vs. Chartering 

9

Why Be a Shipowner? 

• Ownership Pros: 

– Possibly less expensive overall 

– Retention of residual value of vessel 

– Limited liability (per conventions), supported by P&I 

insurance 

– Negotiation of building contact on standard terms 

less time consuming than chartering 

• Ownership Cons: 

– Limited risk management - “standard shipbuilding 

contract” places few risks on shipbuilder 

– Responsible for vessel crewing & management 

– Liability as shipowner for accidents 

Why Be a Vessel Charterer? 

• Chartering Pros: 

– Some risk sharing by vessel owner 

– Only obligation is to pay hire 

– Detailed charter allows for significant control 

– Can obtain charterer’s liability insurance 

• Chartering Cons: 

– Can be more expensive than owning (bidding 

process may achieve most competitive price) 

– Charter negotiations can be more time consuming 

– Liability for cargo may exceed shipowner’s exposure 

in certain cases 

10

LNG Vessel Time Charters 

LNG Time Charter Parties 

• Long term charters 

for LNG vessels 

involve unique issues 

and risk sharing (20- 

25 years) 

• “Standard” crude 

oil/LPG tanker time 

charter forms do not 

adequately address 

these issues 

11

LNG Time Charter Party Forms 

• Models 

– Modified Mobiltime 

– ShellLNGTime1 

– bp Time 

– ExxonMobil 2000 

– GIIGNL (International Group of LNG 

Importers) 

• Some forms are quite shipowner “friendly” 

• Choice of English law vs. U.S. law 

Standard Time Charter Approach 

• Does not typically relieve Charterer from 

paying hire during sales contract force 

majeure 

• Exposure to Charterer could be high 

• Charterer may be unable to reallocate such 

vessel non-utilisation costs under LNG sales 

contract 

12

Recommendations for Time Charterers 

ADDRESS THE RISK: LNG time charter should 

anticipate underlying trade interruption due to 

force majeure 

ONE CONTRACTUAL SOLUTION: 

‣Short-term force majeure reduces hire 

‣Long-term force majeure enables Charterer 

to terminate charter upon payment of fee 

BE REALISTIC: Right to terminate may cause 

difficulties in vessel financing 

Time Charters - 

“Mature Vessel” Issues 

• LNG ship’s physical capabilities (service 

speed, pumping rate, boil-off rate, etc.) may 

become at risk as ship ages 

• LNG vessels’ “maximum useful life” still being 

determined 

• Performance warranties modified as agreed if 

expected to adversely affect ship’s 

performance 

• Life extension survey as a condition to charter 

period extension or renewal 

13

Time Charterer -- Payment & Performance Security 

• Historically, most shipping companies have 

had a small capital base 

• Financial security is usually necessary to 

support LNG project and vessel financing 

• Parent Guarantees 

– Limits and credit rating 

– Reorganization and substitution 

• Standby letters of credit 

– Failure to issue 

– Annual renewal 

Time Charters -- Default Rights 

• For LNG trade, charterer needs default 

definition that is not solely limited to physical 

condition or performance of vessel 

• Need capability to correct shipowner’s repeated 

failures to perform voyages, loadings or 

discharges with right to: 

– replace vessel manager / operator 

– convert charter into bareboat charter for remainder 

of charter period 

14

New Timecharter Trends 

• Tanker pooling / optimisation of vessel 

scheduling 

• More aggressive charter terms 

– Example: offhire if vessel misses daily 

Suez canal convoy window 

• Charterer’s termination / cancellation for 

convenience rights 

• Allocation of cost increases due to change in 

laws 

New LNG Transportation Issues & Trends 

• Physical ship - shore compatibility issues 

due to much larger standard vessel sizes 

• Pooled tanker non-utilization costs -- passed 

along under LNG SPAs? 

• Strains on onshore LNG / gas storage 

capacity 

• “Routine” LNG ship-to-ship transfers 

• Onboard regasification 

– 2 existing tankers with onboard regasification 

– 8 more on order for delivery between 2006-2010 

15

Maritime Liabilities and Limitation Conventions 

Why Discuss Liability Issues? 

• Despite LNG’s critics in early years… 

• … the excellent safety record of LNG marine 

transport is now well established 

• Even so, ….. 

16

Collision Risks 

• LNG Operations in Port Areas (SIGTTO, 2003): 

“Nevertheless, this [LNG] safety record 

notwithstanding, the risk profile of LNG 

tankers presents a very serious residual 

hazard in port areas if the vital structure of the 

tanker is penetrated.” 

“…Yet it is clear, their inherently robust 

constructions notwithstanding, that LNG 

tankers are vulnerable to penetration by 

collisions with heavy displacement ships at all 

but the most moderate of speeds.” 

Liabilities Generally 

- IF an LNG accident occurs, ship owner may 

be exposed to liability - for injuries to third 

parties and property damage - under law 

where accident occurred 

- LNG cargo owner and/or terminal may also 

face potential liabilities 

- Liability normally based on negligence (i.e. 

fault), with ability of some parties to limit 

liability 

- Strict liability and increased limits coming 

17

Typical LNG Liability Limits Under ‘57, ‘76 & ‘96 Conventions 

(Prior to HNS Convention) 

350 

300 

250 

200 

150 

LNG Shipowner Limitations (million US$) [138,000 m 3 ] 

LNG NATIONS: : (12) ALGERIA, BELGIUM, FRANCE, 

GREECE, INDIA, EG, EGYPT, MEXICO, NIGERIA, 

TRINIDAD, TURKEY, UAE & *JAPAN (*until Aug. ’06) 

LNG NATIONS: (5) AUSTRALIA, NORWAY, RUSSIA, 

SPAIN & UK 

LNG NATION: PORTUGAL 

100 

50 

0 

Amended 

1957 Brussels 

Convention 

1976 LLMC 

Limitation 

Convention 

1996 LLMC 

Amendment 

LNG Liability Limits Under HNS Convention 

350 


Cargo Title Holder Limitations (million US$) 

300 

250 

200 

150 

100 

50 

0 

Amended 

1957 Brussels 

Convention 

1976 London 

Convention 

1996 London 

Convention 

Amendment 

HNS 

Convention 

18

HNS Convention - Basics 

• Covers damage occurring in a State Party 

caused by HNS at Sea 

• “Strict liability” - Claimant need only show 

HNS caused the injury, irrespective of who is 

to blame (i.e., proof of causation only) 

• Liability may be shared between: 

ship owner of the vessel (1 st Tier); and 

pool of certain LNG cargo title holders 

(2 nd Tier) via separate “LNG Account” 

Two-Tiered System – 1 ST Tier 

• Ship owners strictly liable, with limits based on vessel 

tonnage 

• Maximum liability is 100m SDR, unless caused by 

Owner’s intentional / reckless act 

• P&I insurance supporting 1 st Tier liability required for 

vessel to enter a State Party 

• No ship owner 1 st Tier liability if caused by: 

– act of war, etc.; 

– intentional act of a third party; or 

– negligence of governmental agency responsible 

for lights / navigational aids 

19

Query: Will increased liability limits and strict liability 

increase P&I insurance costs for LNG ships? 

350 


300 

250 

200 

150 

Most common limit will 

increase almost 3 times 

Ship owners now 

strictly liable 

100 

50 

0 

Amended 

1957 Brussels 

Convention 

1976 London 

Convention 

1996 London 

Convention 

Amendment 

HNS 

Convention 

Thank You! 

20

Critical Issues for Sponsors in the Design and 

Construction of LNG Projects 

Scott A. Greer 

Tower of London - May 4, 2006 

Critical Issues 

1. Selection of Contractor 

2. Cost 

3. Change Orders 

4. Schedule 

5. Quality of Work and Performance 

6. Liability Limitations 

7. Financial Security 

8. Insurance 

1

1- Selection of Contractor 

Who should I select as the EPC contractor? 

• Contractor with LNG experience 

• Financially strong 

• Ability to perform within budget, on time 

and with quality work 

Selection of Contractor 

Sample List of LNG Contractors 

• Bechtel 

• Technip 

• Saipem 

• KBR 

• JGC 

• Tractebel 

• CBI 

2


• But no matter how good the contractor, the 

success of your project depends on the 

individuals 

• Must specify contractor key personnel 


• However, it is a very tight construction 

market for LNG projects. 

• Contractors are becoming choosy. 

– at least one currently declines most terminal 

work 

• Therefore, currently more difficult to choose 

contractors. 

3

• FEED Stage 


• It’s become challenging even at the FEED 

stage 

• Contractor wants: 

– guarantee of EPC work, or 

– termination fee 

• Why? 

– Not want to tie up key people 


• Beware of Contractor Tricks at FEED Stage 

• ownership of drawings and specs 

• confidentiality 

• guarantee of EPC work 

4


• 2 Ways to Contract for EPC Work 

• 1 – Bid 

• 2 – Open-Book Sole Source Negotiation 

• If Bid . . . 

• Recommended Approach 

– FEED by one contractor 

– Bid of EPC not include FEED contractor 

• Advantages/Disadvantages 

– Time 

– Competition 

– Flexibility 


• But Bidding less common in tight market 

– may be possible only in larger projects 

5

• If Open-Book Sole Source Negotiation . . . 

• More common currently for LNG terminals 

• Advantages/Disadvantages 

– Time 

– Competition 

– Flexibility 


• Recommended Approach 

– Competitively negotiate MOU for FEED and 

EPC, setting out key terms, including 

markups (profit, etc.) 

2- Cost 

6

• Cost of LNG Projects Have Increased 

• Historically, prices dip due to improved 

technology 

• Now, due to (1) contractor demand and (2) 

increasing costs in raw materials, cost of 

LNG projects has significantly increased 

• Example Liquefaction Plants (Poten & 

Partners) 

• Recently (2004) - $200 tonnes/year 

• Now - $250 - 350 tonnes/year 

Cost 

• LNG projects typically lump sum 

– with maybe exception for nickel steel 

Cost 

• But now see exceptions for other raw 

materials 

– Contractors have hard time holding prices, or 

charge for the risk 

– e.g., carbon steel 

– ways to mitigate 

• contractor hedge 

• tie to index 

• limit time of variability 

7

3- Change Orders 

What contractual measures can you 

implement to reduce Change Orders? 

Change Orders 

Actions Before Contract Signed? 

• Good Scope of Work 

– Both parties work diligently on scope 

– Performance based specifications, to the 

extent possible, but with sufficient detail to 

describe requirements. 

– Owner should fully vet scope of work, 

particularly if FEED contractor is same as 

EPC contractor 

8

Change Orders 

• Soil Issues - key area 

of claims 

• Risks 

– unknown soil 

– piles 

• Mitigation - drive test 

piles before signing 

EPC 

Contract Measures? 

Change Orders 

• Get Contractor contractual “buy-in” to scope 

• Tight change order clauses: 

– Change only by change order 

• Unilateral by Owner or mutual 

– Monthly lien & claim waivers 

– No “cumulative” impact claims 

9

4- Delay 

• What measures can 

you take to reduce 

your chances of 

having a late 

project? 

• If it is late, what are 

your remedies? 

Delay 

Scheduling 

Obligations 

• Good, detailed CPM 

Schedule 

• Strong contract rights 

re: scheduling 

obligations 

10

Delay 

Identification of Milestones/Damages 

• Milestones: 

• RFCD 

• Delivery of LNG ships 

• Partial Operation? 

• Substantial Completion 

• Operation 

• Final Completion 

• Others? 

Delay 

Delays Caused by Owner, Force Majeure, etc.? 

• Clear definition of force majeure 

• Clear definition of when schedule extension 

is justified 

11

Late delivery? 

Delay 

• Recovery rights 

• Acceleration rights 

• Delay LD’s at Substantial Completion 

– Daily liquidated damage amounts 

– Caps 

– Exceptions to caps 

• willful misconduct, gross negligence 

Delay 

• What if there is a delay at RFCD for a 

terminal? 

• Contractual protection --- 

– indemnification for demurrage charges 

– Liquidated damages 

12

5- Performance Guarantees and 

Warranties 

Key Issues with Performance Guarantees and 

Warranties 

Performance Guarantees/Warranties 

Performance Guarantees 

• Tie Contractor obligations to 

commercial obligations 

• If inadequate performance, what is the 

sponsor’s remedy against contractor? 

– Liquidated damages? 

– Fix? 

– Examples: send-out rate 

13


• Do I specify performance guarantees for all 

key performance issues? 

• It depends …. 

• Examples: 

– Tank heat leak 


Other Critical Issues Re: Performance 

Guarantees 

• New technologies - ex: regasification 

• Availability of ships for terminals 

• Downstream capacity 

• Who operates prior to Substantial 

Completion? 

14


Warranties 

• Length of warranty - usually 18 months to 2 

years 

• Owner right to correct 

• Assignment of Subcontractor warranties 

6- Limitation of Liability 

• Cap amount 

• Exceptions to cap: 

Aggregate Liability Cap 

• Willful misconduct & gross negligence 

• Contract specified exceptions 

• Common law exceptions 

• Insurance proceeds 

• Obligation to finish work 

• Indemnification obligations 

15

Limitation of Liability 

Delay & Performance Liquidated Damages 

• Exceptions to cap 

• Applicability in the event of termination 

• Combined cap? 

7- Financial Security 

What financial security should 

I get from the Contractor? 

16

Financial Security 

1. Parent Guarantee 

2. Letter of Credit/Bank Guarantee or 

Payment/Performance Bonds 

1. general sponsor preference - letter of 

credit/bank guarantee 

2. amount of letter of credit/bank guarantee = 

10- 15% of contract price 

3. Retainage - 

1. Trend: letter of credit/bank guarantee taking 

the place of retainage in many cases 

8 - Insurance 

Are there insurance products other than 

those traditionally provided by a 

contractor, which may provide better 

protection for the owner? 

17

Insurance 

• Issues: 

Contractor Provided Insurance 

Insurance 

• Amount of coverage and coverage gaps 

• Cost 

18

Insurance 

Alternatives 

• OCIP or “wrap up” policies 

– Potential advantages: 

• Lower cost 

• Better and greater coverage 

• CCIP 

Builder’s Risk Insurance 

• Who gets? Sponsor or contractor? 

– Sponsor/lender preference: sponsor 

• Risk of loss - depends on who procures 

insurance 

Insurance 

– Contractor obtained - should bear all risk of loss 

except possibly a few risks which are not obtainable 

• Sponsor/lender should be the loss payee 

– Sponsor obtained - At a minimum, if Contractor is 

involved in the procurement of the insurance, 

Contractor should bear the risk of loss for damages 

caused by its fault and which are not covered by 

insurance 

19

THANK YOU 

Scott A. Greer 

20

KEY ISSUES IN THE ARBITRATION OF 

LNG DISPUTES 

May 4, 2006 

Anthony Wilson 

TYPES OF LNG DISPUTE 

• General Commercial e.g. dispute over price 

adjustment clause in LNG Supply Contract. 

• Construction e.g. responsibility for delay to 

completion of LNG Project; force majeure claims. 

• Shipping e.g. dispute over supply of ships to 

transport LNG from Seller to overseas Buyer. 

2 

1

EXAMPLES OF RECENT LNG ARBITRATIONS 

• UNCITRAL arbitration in London between a LNG 

supplier and its U.S. customer concerning LNG Sale 

and Shipping Agreements. 

Amount in dispute: > US $300 million. 

• Arbitration in London between Nigeria LNG Limited and 

ENEL SpA arising from alleged repudiation of LNG Sale 

Agreement by ENEL. 

Amount in dispute: US$ 13 billion (settled). 

3 

EXAMPLES OF RECENT LNG ARBITRATIONS (CONT) 

• Dabhol Arbitrations. 

Expropriation claim and related disputes. 

Amount in dispute: several hundred million US$. 

• ICC arbitration in Paris between Yemen Exploration 

and Production Co. and the Government of Yemen 

arising from a Production Sharing Agreement. 

Amount in dispute: unknown. 

4 

2

EXAMPLES OF RECENT LNG ARBITRATIONS (CONT) 

• AAA arbitration in New York between US terminal 

owner and US terminal user arising out of a Terminal 

User Agreement and commodity sale and purchase 

arrangement. 

Amount in dispute: declaratory judgment sought. 

5 

MORE TO COME? 

• Expropriation claims - Bolivia / Venezuela? 

• Forced renegotiation of LNG contracts. 

• Increase in Oil and Gas market prices likely to give 

rise to disputes regarding LNG Supply Contract 

pricing formulae / caps. 

• Failure to supply disputes. 

6 

3

DRAFTING THE ARBITRATION CLAUSE 

Example: LNG Import Project 

Multiple Contracts including: 

• EPC Contract 

• Shareholders Agreement 

• Lease Agreement 

• Services Agreement 

• LNG Import Agreement 

• LNG Throughput Agreement (Conversion of LNG 

into Natural Gas) 

7 

DRAFTING THE ARBITRATION CLAUSE (CONT) 

Issues to Consider 

• arbitration or litigation 

• type of arbitration - administered or ad hoc 

• what rules should govern the arbitration 

• the number of arbitrators 

• the seat of arbitration 

• consolidation of related disputes and joinder of 

parties 

8 

4


(CONT) 

• whether to provide for ‘first tier’ methods of dispute 

resolution e.g. negotiation/mediation, expert 

determination, adjudication and dispute resolution 

boards. 

9 

ARBITRATION OR LITIGATION? 

A. Advantages of Arbitration 

The Principal Consideration 

• Neutrality 

• Enforcement 

- 1958 New York Convention on the Recognition 

and Enforcement of Foreign Arbitral Awards 

- Over 150 Contracting States 

- No Equivalent Mechanism for Enforcement of 

Court Judgments 

• Confidentiality 

10 

5

ARBITRATION OR LITIGATION? (CONT) 

Other Considerations 

• Greater Informality 

• Speed? 

• Costs? 

• Finality 

• Simplified Procedures (e.g. no mandatory discovery) 

11 

ARBITRATION OR LITIGATION? (CONT) 

B. Disadvantages of Arbitration 

• Intervention of courts. 

• Disputes arising out of pathological arbitration 

clauses and disputes as to jurisdiction. 

• Joinder and consolidation issues. 

• Procedural uncertainty. 

• Costs of institutional arbitration. 

12 

6

TYPE OF ARBITRATION 

A. Institutional Arbitration (“Administered” or 

“Supervised” Arbitration) 

1. Major Institutions 

i. ICC 

ii. LCIA 

iii. SCC 

iv. AAA/ICDR 

v. ICSID (Only Investment Disputes) 

13 

TYPE OF ARBITRATION (CONT) 

2. Advantages of Institutional Arbitration 

- Tried and tested rules 

- Infrastructure of institution 

- Experienced Administrators 

- Separation of administrative tasks from 

legal tasks 

- Scrutiny of draft award 

- Enforcement 

14 

7


Institutional Arbitration (continued) 

3. Disadvantages of Institutional Arbitration 

- Cost. 

- Delay. 

- Sovereign States may reject institutional 

oversight. 

15 

B. Ad hoc Arbitration 


1. Advantages of Ad hoc Arbitration 

- Tailored procedure (but must be carefully 

drafted). 

- Costs. 

- UNCITRAL rules – a framework. 

2. Disadvantages 

- Unpredictability of resolving issues not 

covered by rules. 

- Potential for abuse and dilatory tactics. 

16 

8


C. Arbitration under Local Laws 

• Usually Based on UNCITRAL Model Law. 

• May Permit Appointment of Arbitrators by Local 

Courts. 

17 

SOLE ARBITRATOR OR TRIBUNAL? 

A. Sole Arbitrator 

• Advantages 

- May be more efficient. 

- Less risk of a ‘split the baby’ approach? 

• Disadvantages 

- Difficulties with appointment. 

- Large or complex dispute may be overburdensome 

for a sole arbitrator. 

- Risk of ‘rogue’ arbitrator. 

18 

9

SOLE ARBITRATOR OR TRIBUNAL? (CONT) 

B. Three Member Tribunal 

• Advantages 

- Parties have a say in the constitution of the 

tribunal. 

- Work load can be shared. 

- Avoids ‘rogue arbitrator’ risk. 

• Disadvantages 

- More cumbersome? 

- Likely to ‘split the baby’? 

NOTE: APPOINTMENT OF THREE MEMBER TRIBUNAL 

MAY BE PROBLEMATIC IF THERE ARE MORE THAN 

TWO PARTIES. 

19 

PLACE OF ARBITRATION - SEAT 

1. Neutrality/Role of national courts. 

2. Enforcement. 

3. Mandatory procedural requirements. 

4. Influence on character of arbitration. 

20 

10

CONSOLIDATION/JOINDER 

• Consolidation of related disputes and joinder of 

parties not generally permitted in arbitration. 

• Consider incorporation of bespoke consolidation 

and joinder provisions in arbitration clauses of 

related project agreements. 

21 

MULTI-TIER TIER DISPUTE RESOLUTION CLAUSES 

• Mediation/Conciliation (non-binding). 

• Expert Determination/Adjudication/Dispute 

Resolution Boards (binding* or referrable to 

arbitration). 

* Even binding expert determination may require 

arbitral award or court judgment for enforcement. 

22 

11


Example: LNG Import Project - SOLUTIONS 

Dispute Resolution Structure: 

• Time-limited period of negotiation between the 

parties’ representatives to reach an amicable 

settlement of the dispute. 

• ‘First Tier’ expert determination of all disputes to 

provide expedited decision pending final resolution 

of the dispute by arbitration. 

• Binding expert determination of specified technical 

disputes. 

23 

DRAFTING THE ARBITRATION CLAUSE (CONT) 

• Final determination of all disputes by arbitration in 

London under LCIA rules (except for Lease 

Agreement - which is subject to local court 

jurisdiction). 

• Consolidation and Joinder provisions in all project 

agreements. 

• Waiver of Sovereign Immunity by state parties. 

24 

12

A. Arbitrability 

WHY GOVERNING LAW MATTERS 

B. Different Approaches to Enforcement of Contracts 

• strict ‘black letter’ interpretation (English/U.S. 

law) 

• good faith 

• law on penalties 

• agreements to agree/agreements to negotiate 

• hardship/contract adaptation e.g. 

- art 313 of German Civil Code 

- art 147 of Egyptian Civil Code 

25 

BILATERAL INVESTMENT TREATY DISPUTES 

A. Protects foreign investors from state expropriation 

and other unlawful interference. 

B. Right of Arbitration under BIT is additional to 

contractual right of arbitration. 

C. To benefit from protection a contracting entity must 

be incorporated in a jurisdiction which has a BIT 

with the host state. 

26 

13

LNG TODAY - King & Spalding

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