Ayodele OniSenior Associate

Energy PracticeBanwo & Ighodalo

Review ofKey Power Sector Contracts

Gas Supply Agreements

Banwo & Ighodalo

Nigeria

Place your company logo here (i.e. replace the spintelligent logo with your

logo). Your company logo is only permitted on the first slide!!!

Outline

•• General PrinciplesGeneral Principles

• Gas Supply Agreements

• The Nigerian Gas Sale and Aggregation AgreementAgreement

General

Investor Friendly Inter-sectorial Policy

Scalable Gas

Infrastructure

Blueprint

General• A more commercially viable gas

market is emerging;

• An overhaul being done re: industry Contracts;Contracts;

• Policy is to have standard documents with a few bilateral terms;

• A proper match between gas & power effective;

General

• Nigeria is ready for the next level-Square pegs in square holes;

• Fine Incentives including

– the PRG;– the PRG;

– Commercial pricing;

– Infrastructure;

– DSO;

Outline

• General Principles

•• Gas Supply AgreementsGas Supply Agreements

• The Nigerian Gas Sale and Aggregation AgreementAggregation Agreement

Gas Sales Agreements

• Negotiation Issues:– Term;

– Hell or High Water (ToP);

– Make-Up Gas;– Make-Up Gas;

– Excess Gas

– Pricing;

– Delivery Project;

– Carry Forward;

– Make Good Gas;

– Price;

Gas Sales Agreements

– Shortfall;– Delivery Point Issues;– Gas Specs & Effect;– Supply or Pay/ Alternative Fuels;– Supply or Pay/ Alternative Fuels;– Deemed Commissioning;– Pre-Commissioning Gas;– Liability Cap for Supplier;– Extensions;– Disputes and Disputed Payments

Gas Sales Agreements

• ToP– Minimum Quantity to take or Pay for;– If not taken, must be paid for;

• Make-Up Gas• Make-Up Gas– Corollary of Take or Pay;– Negotiate a discounted price;– Seller may have a different view;– Middle term: pay difference in price.– Negotiate the price for future take and duration of

take.

Gas Sales Agreements

• Term:– Varies

• Excess Gas– In excess of contract capacity;– Negotiate discounted price;– Reduce your ToP Obligation.

• Carry Forward Gas:– Reduce your ToP Obligation in future;

Gas Sales Agreements

• Short Fall:– Less than contract quantity (daily/ monthly

etc);– Pay for alternative fuels;– Pay for alternative fuels;– Benchmark against cheap alternatives;

• Make Good Gas:– Discounted– Benchmark against LPFO etc;– Pay difference;

Gas Sales Agreements

• Pricing:

– Clear; – Take any loans or equity recovery into – Take any loans or equity recovery into

consideration;– Determine of the country has a pricing regime

for gas;– Whether it falls within the DSO Regime.

Gas Sales Agreements

• Deliver Project/ Delivery Point:– Who would be responsible?– Depends on where and what.– Discounted pricing or factor into.– Discounted pricing or factor into.

• Gas Specs:– Off-spec versus shortfall– Take by Buyer @discount;– Depends on circumstances.

Gas Sales Agreements

• Commissioning Gas;– Effect of off-spec;– Liability to supply: “reasonable” or “best”.– When do “deem” and “start earning”: do you – When do “deem” and “start earning”: do you

want to and effect;

• Disputed Amount Account:– Payment of amount not disputed;– Quantum in DAA: All or a fraction?– What fraction, interest payment alternative.

Gas Sales Agreement

• Basis for extension:– when?– How long?

• Liability:• Liability:– Seller typically;– Who is more desperate?– 1-5% NGC;– A bit more generally.

Outline

• General Principles

• Gas Supply Agreements

•• The Nigerian Gas Sale and The Nigerian Gas Sale and Aggregation AgreementAggregation AgreementAggregation AgreementAggregation Agreement

The Nigerian GSAA

• Enabling policy framework to support critical mass of gas supply to power sector;

• Robust gas grid being developed for diverse sources of supply;

• Looks promising;

• Aggregator established to manage Domestic Gas

Supply obligations volumes;

• First point of contact for Gas Buyers to access gas for

domestic market use;

The Nigerian GSAA

18

• Coordinates and manages wholesale gas supply from

Gas Producers to eligible Purchasers in Nigeria;

• Facilitates the execution of the GSAA and GTA

between the buyer, seller and transporter

respectively;

• Operational since Jan 2010;

The Nigerian GSAA

19

THE Nigerian GSAA

• Designed to present common terms for wholesale Gas Supply in Nigeria – it’s a template

• Highlights• - Term

- Gas Purchase Order- Conditions Precedent

20

- Conditions Precedent- Take or pay- Nomination issues- Payment security- Gas specification - Transportation to Delivery Point- Transitional based pricing scheme - Termination

• Collateral Contracts

PARTIES• Seller (s)

- For NNPC JVs: Operator will represent the JV[Seller Representative Agreement]

21

• Aggregator

• Buyer- GENCOs & IPPs

Critical CPs• Approvals for the construction and operation of

Seller & Buyer Facilities;

• Construction Contracts signed;

• Financial Close/ FID (in NNPC JVs) for construction

22

• Financial Close/ FID (in NNPC JVs) for construction of Seller facilities;

• A Gas Transportation Agreement signed;

• Allocation Agreement - where there are more than one Seller at Delivery Point;

• Payment security/guarantees in place;

22

Delivery Point, Title, Transmission

• Delivery Point: inlet flange of nearest

gas transmission pipeline to Seller’s

facilities;

23

facilities;

• Title to and risk in the gas to pass from

Seller to Buyer at the Delivery Point;

• Buyer to procure transportation from the

Delivery Point at own risk and expense.

23

TAKE OR PAY

ToP= 80% of

ADJUSTED ACQ

ACQ

24

- SHORTFALL - CARRY –FORWARD GAS

- FORCE MAJEURE

- MAINTENANCE DCQ

REDUCTION

INVOICING AND PAYMENT• Monthly invoices for Gas delivered;

• Yearly reconciliations;

• Payment by Buyer into Escrow Account to be evidenced;

• Payment to be made in Naira;

• No set - offs allowed;

• Disputed amounts to be paid into Disputed Amount Account;

DEFAULT IN PAYMENT

• Issuance of Notice of Non-Payment;

– To be issued 2 days before payment due date;

– To give 5 days Grace Period commencing the – To give 5 days Grace Period commencing the day after payment due date;

• Buyer’s failure to pay within the Grace Period will entitle Seller to trigger the LC.

COMMISSIONING GAS• Commissioning Period agreed for testing of facilities

- period b/w the end of construction and the Start Date

• Gas supplied during Commissioning Period:

27

- on a “reasonable endeavours basis”

- sold at Contract Price

• No liability for Off – Spec delivery;

• No ToP liability;

• No Shortfall liability;

EXCESS GAS• Gas required by Buyer in excess of the MDQ;

• Seller’s obligation limited – “Reasonable

Endeavours” requirement only;

28

• Has no obligation to deliver Excess Gas so no Shortfall liability for failure to deliver same;

• Excess Gas is sold at the Contract Price;

• Excess Gas will reduce the ToP and ACQ

MAKE GOOD GAS• Gas made available by Seller to Buyer in

excess of nominated quantities;

• An attempt by Seller to restore or “Make Good” Shortfall Gas and therefore reduce Shortfall liability;

29

Shortfall liability;

• To be taken by Buyer only on a “reasonable endeavours” basis;

• Aggregator can help to find alternative Buyers for the Make Good Gas

• Sold at the Contract Price

Make – Up & Carry Forward

• Make-Up Gas (MUG) is gas paid for under ToP not taken;

• There is no duration limit for MUG recovery;

• MUG is recoverable at the prevailing

30

• MUG is recoverable at the prevailing price at time of recovery;

• Carry Forward Gas (CFG) is gas taken in excess of ACQ;

• CFG adjusts Annual Contract Quantity for next year;

SHORTFALL GAS• Gas which Seller fails to deliver in

response to Buyer nomination [unless excused]

• Shortfall Gas arises from daily nominations

31

• Shortfall is calculated on a yearly basis even though it occurs on a daily basis

• “Shortfall Tolerance” – an upper and lower band of Shortfall which will be excused by Buyer

SHORTFALL GAS REMIEDIES

• B is entitled to a 10% discount on the Contract Price of the Shortfall quantity;

• S liable to pay for alternative fuel sourced by Buyer;

32

sourced by Buyer;

• S may, at Buyer’s election, pay financial compensation to Buyer;

• If the Aggregate Shortfall Tolerance exceeds an agreed quantity, then Shortfall occurs;

OFF – SPEC GAS• General rule: Gas must conform to contract spec

• B’s remedies

- right to reject Off spec gas with no liability

- if rejected, Off Spec Quantity = Shortfall Gas

- compensation for cost of direct damage to Buyer’s facilities, including cost of cleaning and clearing B’s

33

- compensation for cost of direct damage to Buyer’s facilities, including cost of cleaning and clearing B’s facilities

• NOTE: possibility of negotiated/agreed Offspec Gas for an agreed (initial) period

• Where knowingly taken, Seller absolved of liability

MEASUREMENT

• Seller to measure gas delivered at the

Delivery Point;

34

• Buyer to have right of access to verify its

accuracy

RESERVOIR RISK

• Depletion

• Reservoir failure – constitutes FM if it is • Reservoir failure – constitutes FM if it is total and verified by DPR

– Is this sufficient protection for you?

TERMINATION• EVENTS

- Effluxion of time- Delivery of Contract Quantity- Issuance of Termination Notice- Operation of Law

36

- Operation of Law- Insolvency- Prolonged Failure to Deliver Gas- Prolonged failure to take Gas- Prolonged Force Majeure

Want to Know More?BUY BOOK: INTERNATIONAL ENERGY SECURITY

ByAyodele Oni

37

THANK YOUTHANK YOU

Ayodele OniAyodele Oni

Senior Associate (Energy)Senior Associate (Energy)

Banwo & IghodaloBanwo & Ighodalo

0805236248008052362480