course on lng business

8/10/2019 Course on LNG Business

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COURSE ON LNG

BUSINESSSession-6

Gas/LNG contracts


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Quantity

Various terms used for adjusted quantities are makegood gas, Restoration quantity, make up gas

MAKE GOOD GAS can be requested for quantities ofgas not taken by Buyer by exercising the downwardflexibility

Restoration Quantity is that quantity of gas which Sellerfailed to supply due to Force Majure conditions inprevious years. Buyer can request for additionalquantities against this for determining AACQ in anannual programme

MAKE UP GAS is the quantity of gas that the Buyer

could not take but paid for under Take or pay provisionsin previous years

Generally these quantities are required to be supplied bySeller subject to his having flexibility to give suchsupplies and such additional quantities in a year are

limited to a certain percent of ACQ as maximum possiblequantity.


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Quantity

Gas taken by Buyer in a year is adjusted in followingorder of priority of heads:

1. ACQ

2. Make up gas

3. Make good gas4. Restoration quantity

5. Upward flexibility quantity

There may be provisions to supply such quantitieseven after Term of Contract and such period is

generally called Recovery Period AACQ=ACQ+MU+MG+RQ+UF-DF

A ledger of these quantities is maintained by everyyear adjusting cumulative quantity under each head


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Annual programme and Nomination

Seller gives Notice of annual quantities available for theyear

Buyer gives Notice of annual quantities required in theyear

Such Notices normally give quarterly requirements There are provisions for Buyer to revise annual

programme before a certain period especially to changeAACQ by changing various categories of supply he canask for

After annual quantities are agreed there is a detailedprocedure laid out to give quarterly, monthly and dailyrequirements by the Buyer. Such requirements arecalled Nominated Quantity by the Buyer


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Annual programme and Nomination

There are certain flexibilities provided to changeNominations within certain limits and such revisednominations on daily basis are called ProperlyNominated Daily Quantity (PNDCQ)

Variations with respect to PNDCQ on daily basis isallowed in a narrow band and is generally required to befollowed

Aggregate of PNDCQ in a year will not exceed AACQ forthat year

Generally there is a limit upto which DCQ can beconsidered by Seller, in any year, to consider suppliesunder various heads considered in Quantity for AACQ


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Delivery pressure and temperature

Min. and Max. pressure at Deliver Pointare specified

Generally gas supply temperature is near

ambient conditions but in case of need forpressure reductions at Buyers end there

may be need to ensure that gas supply

temperature is not too low whereby gasafter pressure reduction goes below its

Dew point.


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Quality

Gas is required to be supplied as per agreedrange of composition and calorific value

If gas is not as per agreed specs. Then it iscalled off-spec gas

Buyer has right to reject off spec gas and nonsupply due to such rejection is considered asSellers shortfall in supply

Buyer and Seller may agree continue off spec

gas sale and at mutually agreed terms Seller is obliged to make reasonable endeavors

to restore the gas quality as per specs as soonas possible


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Measurement procedures

Seller is generally required to install necessaryinstruments and meters to measure the gasquality and quantity supplied under the Contractat the Delivery Point

Such measurements result in calculations ofMMSCM and mmbtu of gas supplied

The type of instruments to be used and

maximum possible tolerance limits inmeasurements is agreed upon. Necessaryredundancies in case of certain instruments andequipment are also agreed upon


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Measurement Procedures

Buyer normally has option to install his owncheck meters if he so desires

Generally a joint measurement and/or

certification procedure is laid down in Contract.Buyer has inspection rights on such facilities.

Periodic checks and recalibrations are providedfor with detailed procedures for it

In case of fault detection in measurementdetailed procedures are provided for revising thequantities supplied under the Contract


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Price

Pricing formulae are agreed upon

References for indexation used and their use in pricingformulae are clearly identified

Gas supplied is to be paid for as per the gas price

determined by such formulae for each billing period Price may be denominated in FE as well as Rupees. In

case of FE procedures for determining applicableexchange rate are provided for

Applicable taxes and levies are normally charged extraat actuals

Change in Law provisions take care of any change intaxes and levies from time to time.

There may be provisions for periodic revisions in pricing

formula


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Billing and payments

Seller is required to raise invoices at agreed intervals(may be fortnightly/ monthly)

Invoice to give full particulars of quantities of gassupplied under different heads and the price payable foreach

If any changes in quantities are required then correctioninvoices are to be issued

Miscellaneous invoices are to e raised in case ofamounts payable by the concerned party as perprovisions of Contract e.g. difference in price for makeup gas

Annual statements are required to reconcile variousquantities of gas supplies due and/or made during theyear including Take or pay obligations or LDs forsuppliers shortfall in quantities

Payment Due Dates are agreed after 5-10 days ofinvoice date


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Billing and payment

Buyer has right to dispute any invoice with supporting documentsand a procedure is defined for notifying and resolving such dispute

Normally Buyer is expected to pay as per Invoice irrespective ifDisputed amount

Provisions are normally made for refunding disputed amounts toBuyer with interest, if on dispute resolution it is determined thatBuyer has been overcharged

Currency of payment is defined

Very elaborate payment security mechanisms are agreed uponwherein Buyer is required to provide irrevocable LC or BG from areputed bank in favour of Seller

LC or BG amounts are agreed based on anticipated value of agreednumber of billing cycles

In any case detailed credit analysis of Buyer is undertaken by Sellerbefore entering into a Contract to have comfort about paymentsecurity


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Take or pay provisions and LDs

Normally Buyer is obliged to take the agreed AACQ ofgas in a Contract Year and pay for it

If for any reasons Buyer fails to take this quantity (or anyagreed percentage of AACQ) in a year he is liable to payfor that quantity of gas irrespective of fact that he may

have actually taken less quantity of gas Such obligations of Buyer are called Take or pay

obligation

Quantities not taken due to Force Majure are excludedfrom calculating Take or pay liabilities

Sellers shortfall in supplies shall also be deducted fromthe amount of gas required to be taken by Buyer fordetermining such liability

There may be some finer provisions for quantitycalculations like not considering gas off taken in excess

of PNDCQ on any day or make up gas taken etc.


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Take or pay provision and LDs

If the Seller fails to supply quantity of gas asper PNDCQ then such shortfall quantities arecalled Sellers shortfall quantities

No Take or pay liability for this quantity

Seller may have obligations to compensateBuyer in some agreed manner

Such compensation by Seller is calledLiquedated Damages (LDs) payable by Seller

LDs may be for compensating Buyer forincreased cost due to use of alternate fuel or itmay be predetermined as loss of value forBuyer due to nonavailability of gas


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Dispute resolution mechanism

Parties would normally be obliged to discuss and resolveany dispute amongst them by mutual discussions

In case of failure to resolve dispute by discussions,Parties would have agreed to a well defined mechanismand procedure for dispute resolution

Dispute resolution may be by a sole expert, especially incase of dispute related to technical aspects, or by an

Arbitration process

Arbitration may be as per Indian Arbitration andConciliation Act,1996, or as per ICC or UNCITRAL Rules

Venue, manner of appointing arbitrators, cost ofarbitration etc. are clearly agreed and specified

Award of arbitration is binding on all parties and is notchallengable in any court of Law except for enforcing theaward.


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Force Majure

Any act of GOD/NATURE CALAMITY,unforeseen circumstances etc. are calledForce Majure events

If any Party declares Force Majure it isrelieved of its obligations which areaffected by the event of Force majure andtill the time such event continues

Types of events classified as Force Majureare listed in the Contract


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Force Majure

Typical events are as follows:

1. Act of God: Fire, flood, cyclone,storm,

lightning,hrricane,tornado,earth quake,

landslide, epidemic etc.2. War, riot,civil war,blockade etc.

3. Strike or lock out (this is normally a highly

debatable issue)4. Political FM: Acts of Government which

prevent a Party from performing its obligations


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Force Majure

Procedure is described in detail to give Noticeabout Force Majure event

Affected party is obliged to take all steps to

nullify effect of FM as promptly as possible Party claiming FM is expected to keep other

parties informed about status

If FM lasts for more than predetermined period

then parties can meet to discuss future course ofaction including possibilities of Termination ofContract if required


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Warranties and Indemnities

Parties shall warrant that they have necessary permits tocreate their respective facilities as required under theContract

Seller shall also warrant that it has necessary rights andtitle to gas it proposes to sell

If any party collects tax at applicable rates but fails todeposit it with authorities then it has to indemnify otherparties for any liabilities that arise to them from such taxauthorities

Similarly each party will indemnify others from anyliability arising out of inaccurate of representations andwarranties made by that party. Further they are also toindemnify others from any third party liabilities arising outof their action and/or inaction


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Termination

Events of Defaults are listed eg.:

1. Sellers failure to supply Contracted quantities for a consecutivepredefined period

2. Buyers failure to take contracted quantity of gas for a predefinedperiod

3. Buyers failure to pay for gas4. Prolonged FM event

5. Any party going under liquidation/winding up

6. Material breach of any contractual provisions

Upon Default notice is given and cure period is given. Failurebeyond cure period can result in Termination

Rights accrued prior to Termination will survive There may be provisions for survival of certain provisions of

Contract even upon Termination for certain period.


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Assignment

Generally rights and obligations are not allowed

to be assigned by any Party without prior

consent of other parties

However, for assignment to any Affiliate of aparty is allowed without any prior approval

Provisions are made to allow assignment of

Contract to lenders/ bankers for purpose of

security against funding done for their

investments


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Miscellaneous

Entire agreement including annexure

No amendment without signed agreement

If any party waives any Right at some time it does notimply it has waived that Right even in future

No Party is liable for consequential losses Confidentiality-no disclosure except as required by Law

Severability-If any provision is invalidated under Lawthen balance provisions will survive

Governing Law

Addresses for issuing Notice Survival of certain clauses even on Termination

Contract signed duly authorized signatories

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