lng master sales agreement & their value in a destination flexible lng market - steven miles
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trade agreement lngTRANSCRIPT
Rome3 December 2007
LNG Master Sales Agreements (MSAs) and their Value in a Destination
Flexible LNG Market
Contract Risk Management Master ClassPresented by Steven R. Miles
Jason K. Bennett
CWC World LNG Summit (December 2007) Page 2
Introduction to Baker Botts' LNG Practice800+ attorneys in 11 offices worldwide
35 attorneys with LNG project experience
85+ LNG projects; 20 in last three years
Ranked #1 Worldwide Oil & Gas Law Firm 2005, 2006, & 2007
Ranked Best Overall Service – Energy Sector, Worldwide and Best Knowledge – Oil and Gas Sector, Worldwide by the most recent Petroleum Economist survey of Energy Executives
CWC World LNG Summit (December 2007) Page 3
Introduction to Baker Botts' LNG PracticeSuccessful launch of several recent LNG deals, including assisting our clients in:
Launching the first LNG project to bring LNG to W. Coast of N. America, the first LNG project in S. America, and the first LNG project in Equatorial GuineaAssisting the Brass LNG project in Nigeria on all major project agreements, including gas supply, LNG sales, EPC, etc.Securing LNG supply into new terminals in U.S., China, India, and BrazilNegotiating Terminal Use Agreements and obtaining regulatory andenvironmental authorizations for U.S. receiving terminalsAssisting financial institutions with investments in LNG projects and in developing innovative marketing models for LNG
Co-Chair of industry-wide effort to draft uniform LNG Master Sales Contract
Map of Baker Botts LNG Projects
Brazil:Pecem LNG TerminalRio de Janeiro
LNG Terminal
India:Dahej LNG Terminal Kochi LNG TerminalDahbol ProjectPipavav Project
NigeriaBonny LNGBrass LNG
Mexico:ProposedLNG Project
Peru:Peru LNG Project
Trinidad & Tobago:Atlantic LNG Project
Venezuela:Jose ProjectMariscal SucrePlatforma Deltana ProjectVLNG Project
Bahamas:Ocean Cay Project
Canada:Bear HeadCanaport LNG
Indonesia:Tangguh ProjectBontang Project
Dominican Republic:
Andres Project
Honduras:El Faro Project
JapanOsaka GasWestern Buyers
Equatorial Guinea:EG LNG Project
Puerto Rico:Ecoelectrica Project
Qatar:QatarGas 3 ProjectQatarEurope Project
United States Gulf Coast:Golden Pass LNG Terminal Pearl Crossing Project Pelican Project Vista del Sol LNG TerminalCameron LNG Project Freeport LNG ProjectCompass Port LNG Project Main Pass Energy HubBeacon Port Project Port Arthur LNG
United States - West Coast:Jordan Cove Energy ProjectKenai LNG ProjectNorthern Star LNG
United States - Northeast:Distrigas ProjectWeaver's Cove LNG Project
United States -Mid-Atlantic:
Cove Point LNGSparrows Point
United States - Southeast:Elba Island Project
Australia:Darwin LNG Project
China:Guangdong LNGFujian LNGZhejiang LNGUnited Kingdom:
Dragon LNG
CWC World LNG Summit (December 2007) Page 5
Key Topics for DiscussionWorldwide LNG Market Conditions
Overview of the LNG Value Chain and LNG Project Agreements
LNG Sale and Purchase Agreements (SPAs)
LNG Master Sales Agreements (MSAs)
Differences Between MSAs and SPAs
Variations in MSAs
Use of MSAs in the Market
Discussion: Will MSAs form the basis for a Spot Market?
CWC World LNG Summit (December 2007) Page 6
Worldwide LNG Market ConditionsLNG market is going global - convergence of previously regional markets combined with new producers and expansions of existing projects coming online soon
High demand for LNG, including growing import demand in traditional Asian markets, the U.S., Latin America, China, India, and elsewhere
It is a Seller's market, at least through 2012 but LNG supplies have much greater destination flexibility than in the past
CWC World LNG Summit (December 2007) Page 7
Worldwide LNG Market Conditions- Cont’dBuyers and Sellers are benefiting from destination flexibility that is becoming a standard feature of LNG purchase and sale agreements
Buyers and Sellers are adopting other flexible contractual structures for purchases and sales of LNG, including LNG Master Sales Agreements (MSAs)
Speculation exists about the rise of an LNG spot market based on the flexible contractual structures such as MSAs
CWC World LNG Summit (December 2007) Page 8
LNG Project Value Chain
The LNG project value chain is a series of separate but interdependent activities, each of which is critical to an LNG project and each of which relies on the same project revenue stream.Each activity has its own commercial agreements and arrangements connecting the participants.
Gas Production/ Liquefaction/ LNG Transportation/ Regasification/ Market/Pipeline LNG Marketing Interim LNG Storage Pipeline/ Gas Marketing
Gas storage Company
CWC World LNG Summit (December 2007) Page 9
LNG Project AgreementsGas Production/ Liquefaction/ LNG Transportation/ Regasification/Pipeline Market/ Gas
Pipeline LNG Marketing Interim LNG Storage Gas Storage(?) Marketing Company
GSA SPA TCP TUA/TSA GSA
Transportation MSA SBC Transportation Gas MarketingAgreement Agreement Agreement
Liquefaction TransportationAgreement Services Gas Storage
Contract AgreementLiquids
Processing/Sales LNG Storage ShipperAgreement Agreement Cooperation
AgreementTLA
SchedulingAgreement
Financing Agreements
CWC World LNG Summit (December 2007) Page 10
LNG Sale and Purchase Agreement Basics
Long-term SPAs are the cornerstone of most commercial arrangements between LNG buyers and sellers which supports the LNG value chain
SPAs typically provide most if not all revenues for an upstream LNG project and provide anchor supplies for development of LNG regasification facilities
CWC World LNG Summit (December 2007) Page 11
LNG Sale and Purchase Agreement Basics-Cont’d
Key features of SPAs typically include:Term of 15-25 years
Fixed Annual Contract Quantity
Pre-Agreed Pricing
Firm Take or Pay obligation for buyers of LNG
Firm Deliver or Pay obligations for sellers of LNG
One party provides LNG transportation (FOB/DES/CIF)
CWC World LNG Summit (December 2007) Page 12
Overview of Master Sales AgreementsMSAs are used for short-term or spot sales of LNG
MSAs typically consist of a main MSA that sets forth the "General Terms and Conditions" and a shorter "Confirmation Memorandum" attached as an appendix to the MSA
MSA General Terms and Conditions contains key terms that will apply to all sales under the MSA- such terms do not result in an obligation to purchase or sell LNG
Each executed Confirmation Memorandum constitutes a separate agreement between Buyer and Seller to purchase one or more cargoes of LNG
CWC World LNG Summit (December 2007) Page 13
Master Sales Agreements: How They Operate
Typical General Terms and Conditions in an MSA include the following:
LNG quality
Scheduling
Performance obligations
Liability limitations
Billing and payment
Dispute resolution
Force Majeure
CWC World LNG Summit (December 2007) Page 14
Master Sales Agreements: How They Operate-Cont’d
Typical General Terms and Conditions (cont'd):Business Practices
Representations and Warranties
Measurement and Testing
Confidentiality
The Confirmation Memorandum incorporates by reference the General Terms and Conditions
CWC World LNG Summit (December 2007) Page 15
Master Sales Agreements: How They Operate-Cont’d
Typical terms included in an executed Confirmation Memorandum:
Quantity
Price and payment information
Loading and unloading ports
Time of delivery (e.g., the "Arrival Period")
Identification of the LNG Tanker(s) delivering the cargo(es)
Allowed laytime
CWC World LNG Summit (December 2007) Page 16
Master Sales Agreements: How They Operate-Cont’d
Typical terms included in an executed Confirmation Memorandum (cont'd):
Demurrage rate
Quality (if not specified in the General Terms and Conditions)
Credit support supplied by the parties
Each executed Confirmation Memorandum constitutes a separate agreement between Buyer and Seller
CWC World LNG Summit (December 2007) Page 17
Differences Between MSAs and SPAsTerm
Typical SPA: 20 yearsTypical MSA: indefinite (or several years)Typical transaction under an MSA: single cargo (a spot sale) or several cargoes over a relatively short period of time (short-term sales)
Financing: Unlike an SPA, an MSA is usually not used to finance a large LNG projectGas Supply and Gas Offtake: For an MSA, long-term supply of gas and viability of downstream markets are not issues
CWC World LNG Summit (December 2007) Page 18
Differences Between MSAs and SPAs - Cont’dConstruction Risk and Conditions Precedent: Because an MSA is not driving the financing of the project (and is often used for existing projects), construction risk is not an issueForce Majeure: With an MSA, Force Majeure (FM) is often less rigorously negotiated and less exhaustively defined
Example: Since a specific LNG Tanker is named in the Confirmation Memorandum for each cargo, FM for transportation events is limited to events affecting the LNG Tanker, and relief is limited to the relevant cargo(es) listed in the Confirmation Memorandum
CWC World LNG Summit (December 2007) Page 19
Differences Between MSAs and SPAs - Cont’dTake-or-Pay: Buyer's failure to take and payment of damages does not result in make-up-rights, but may generate a "mitigation sale credit"
Pricing: In an MSA, this is reserved for Confirmation Memorandum, and could be a fixed price
Credit: For MSAs, credit requirements may depend on counterparty, timing of transaction, and quantity of transaction. Where Buyers are required to post credit support, letters of credit are frequently used
CWC World LNG Summit (December 2007) Page 20
Variations in MSAs: Delivery
An MSA will specify whether it covers (i) only deliveries at the unloading port ("delivered ex-ship" or "DES"), (ii) only deliveries at the Loading Port ("free on board" or "FOB"), or (iii) both DES and FOB
An MSA covering both DES and FOB provides greater flexibility and a greater variety of sales arrangements, but is it more complex
CWC World LNG Summit (December 2007) Page 21
Variations in MSAs: Types of Sales
An MSA will specify whether it covers spot sales (e.g., a single cargo) or short-term sales (e.g., sales of several cargoes over a period of time)
An MSA covering firm short-term sales of multiple cargoes may be a hybrid of an SPA and a conventional MSA
A scheduling program may be necessaryCredit support and Force Majeure may become more important
CWC World LNG Summit (December 2007) Page 22
Variations in MSAs: Consequences for Failure to Perform
Seller's performance obligations: Specifies the consequences for failure to deliver LNG
Liquidated damagesActual damages
Buyer's performance obligations: Specifies the consequences for failure to take LNG
Take-or-pay with make-upTake-or-pay with mitigation sale creditLiquidated damages
CWC World LNG Summit (December 2007) Page 23
Variations in MSAs: Parties
An MSA will specify whether (i) a given party must always be the Buyer or Seller, or (ii) either party may be Buyer or Seller
An MSA permitting either party to be Buyer or Seller will be more complex
CWC World LNG Summit (December 2007) Page 24
Variations in MSAs: Other
Assignment/Affiliate: Specifies whether affiliates of the parties to the MSA may sign Confirmation Memoranda
Scheduling issues: Specifies flexibility in delayed or rescheduled deliveries under an MSA- Short-term and spot sales are generally of lower priority than long-term arrangements
Taxes and off-shore title transfer
CWC World LNG Summit (December 2007) Page 25
MSAs in the Market: An Outlet for Excess Cargoes
MSAs permit sales of LNG produced in excess of committed SPA sales for an LNG liquefaction project, including
one-time excess cargoes
long-term production from an LNG liquefaction facility in excess of nameplate
CWC World LNG Summit (December 2007) Page 26
MSAs in the Market: Source of Supply
Buyers of LNG might source additional cargoes from MSAs to meet seasonal or temporary LNG demand
Some regasification projects are being built partially in reliance on LNG supplied pursuant to MSAs
In a Sellers' market for LNG with tight supplies and SPA destination flexibility, MSAs provide Buyers with the possibility of sourcing supply for one or more cargoes based on a “call” for cargoes that reflects a partially liquid supply market
CWC World LNG Summit (December 2007) Page 27
MSAs in the Market: Destination FlexibilitySuppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing seasonal peaks in demand
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CWC World LNG Summit (December 2007) Page 28
MSAs in the Market: Destination FlexibilitySuppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing short term price differentials
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CWC World LNG Summit (December 2007) Page 29
Discussion: Will MSAs form the basis of a Spot Market?
Does an LNG spot market already exist, and if not, are MSAs creating a limited form of LNG spot market?
What else is necessary to create a more robust LNG spot market?
For buyers and sellers already operating under long-term SPAs, would an LNG spot market be more favorable to buyers or sellers?
CWC World LNG Summit (December 2007) Page 30
Discussion: Will MSAs form the basis of a Spot Market?
Would an LNG spot market created by MSAs decrease the amount of LNG sold under traditional SPAs?
How would a robust LNG spot market affect the development of future LNG projects?
Will the LNG value chain be disrupted by a robust spot market for LNG?
CWC World LNG Summit (December 2007) Page 31
Conclusion
MSAs serve a different purpose than long-term SPAs and impose different obligations on the parties
MSAs facilitate short-term and spot purchase and sales of LNG cargoes that are increasingly important to LNG liquefaction and regasification projects
MSA are an important part of the evolving LNG market, including the development of a spot market for LNG
CWC World LNG Summit (December 2007) Page 32
Thank You
Jason BennettBaker Botts L.L.P.2001 Ross Avenue
Dallas, TX 75201-2980
Tel: +1.214.953.6425Fax: +1.212.661.4425
Email: [email protected]
Steven R. MilesBaker Botts L.L.P.
1299 Pennsylvania Ave., NW Suite 1300Washington, D.C. 20004
Tel: +1.202.639.7951Fax: +1.202.585.1090
Email: [email protected]