lng contract structure

7/25/2019 LNG Contract Structure

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LNG CONTRACT STRUCTURE

PETRONET LNG LIMITEDOctober 27, 2014


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Basic Driving Factors & Risks

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Basic Driving Factors for the contract-

Seller Monetization of Gas

Buyer-Securing feedstock/ fuel for facilities

What risks do they bear?

Seller Volume risk (Supply Risk)

Buyer-Price Risk (Market Risk)


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Major concerns of Buyer & Seller

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Buyers Concerns Sellers Concerns

Timely Commencement ofSupply

Timely Commencement ofBuyers Facility

Availability of Quantity Security of Payment

Reliability of Supply Quantum of Demand

Sustainable Price of Gas Viable Price of Gas

Flexibilities in off-take ofLNG Design/ Investments for

Catering to Buyers NeedsReliability of Transportation

Quality of Gas


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BUYER

SELLER

LENDER

SHIPPER

S P A

COMMERCE OF LNG

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CONTRACTUAL STRUCTURE FOR A REGAS PROJECT

REGAS TERMINAL

PORT OPERATOR

MARITIMEBOARD

SHIPPING TIMECHARTER

LNG SUPPLIER LENDERS/ PAYMENTSECURITY

GAS OFFTAKERS &PIPELINE

EPC/ PMC/ PMT

SHAREHOLDERS

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Contractual Risks for the Parties

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Buyers Risks

Price RiskCurrency RiskRisk of flexibility of supplyRisk of transport default

Risk of Force MajeureRisk of project completionRisk of assignmentPolitical Risk

Environmental Risk

Sellers Risks

Volume Risk

Risk of paymentPrice RiskRisk of aberrantnominationsRisk of transport defaultRisk of Force MajeureRisk of project

completionRisk of Gas qualityRisk of assignmentPolitical Risk

Environmental Risk


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Role of contracts in financing Buyers projects

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Concerns of Buyers Project Lenders

Is a firm Gas supply contract in place ?

Does the contract period match at least the term ofthe loan?

Is the Buyer dependent on a single supplier or hasmultiple suppliers?

Is the Buyer dependent on a single fuel or hasaccess to multiple fuels?

Is the price of gas competitive?


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Role of contracts in financing Sellers projects

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Concerns of Sellers Project Lenders

What volumes have been booked?

What is the contract period? Does it match at leastthe term of the loan?

Is the sale price competitive ?

Is complete contractual structure in place?

Are the cash flows adequate enough to meet thedebt service requirements?

What is the credit-worthiness of the Buyer?


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TYPES OF CONTRACT

Long Term SPA/GSPA

Short-Medium Term SPA/GSPA

Spot Master SPA/GSPA with Confirmation notice

HOA & Term Sheets-Binding/Non Binding

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CRITERIA FOR SELECTION OF LNG SUPPLIER

Contractual supply rights to produce and sell LNG- backed by host Government/major supplier

Allocated proven & economically exploitable gasreserves

Financial/Technical ability to meet implementationschedule

Existing LNG Liquefaction facilities/new projects

Portfolio supplies vs. Project supplies mix/hybrid 10


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LNG/GAS CONTRACTS

Articles / provisions could be broadly classified in to four

parts :

1. General

2. Commercial

3. Technical

4. Legal

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GENERAL ARTICLES IN SUPPLY CONTRACTS

Preamble

Sales & Purchase

Term & Termination

Conditions Precedent

Notices

Details of Performance. Joint Coordination Committee.

Definitions & Interpretations.

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CONDITIONS PRECEDENT OF BUYER

Authorizations / Approvals / Permissions of respective Govt.,Management's and Shareholders.

Financial closure for receiving, unloading storage andvaporization facilities.

Arrangements for design, construction, operation, ownershipand or use of LNG receiving facilities as well as for

transmission network by Buyer and for liquefaction facilitiesby Seller.

Creditworthy Market.

Commercial framework.

Arrangement for ships if contract is on FOB basis.

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CONDITIONS PRECEDENT OF SELLER

Authorizations / Approvals / Permissions of respectiveGovt., Management's and Shareholders of Seller.

Allocation of adequate gas reserves to supply LNG forcontractual period by the Government/owner of concessionarea.

Certification of gas reserves from reputed agency.

Ability to complete financial closure within the given timeperiod for construction of facilities.

Construction of processing, liquefaction and unloadingfacilities by supplier.

Arrangement for shipping for transportation of LNG in caseof Ex-Ship contracts.

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TECHNICAL ARTICLES IN CONTRACT

Sellers & Buyers Facilities

Quality

Measurement and Tests

(With Details on Measurement)

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COMMERCIAL ARTICLES IN LNG CONTRACTS

Sources of Supply.

Taxes, Duties & Charges.

Financing

Quantities.

Invoices & Payment.

Transportation.

Contract Sales Price.

Programming of Deliveries.

Additional Matters.

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LEGAL ARTICLES IN LNG CONTRACTS

Transfer of Title

Liabilities Amendment & Waiver.

Confidentiality

Sovereign Immunity

No Intermediaries. Force Majeure.

Assignment

Applicable Law

Arbitration

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FORCE MAJEURE

Events not within Control of affected party not caused by

negligence or willful misconduct, generally inclusive eventslike AOG, Strike, War, loss to facilities, acts of Government

preventing ability to perform

Suppliers prefer to include their facilities including upstream

production units and liquefaction facilities, tankers and

reservoirs

Buyers prefer to include Tankers, re-gasification facilities,

Pipelines and downstream consumer facilities

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TITLE TRANSFER

In case of FOB contracts at Load Port

In case of DES Contract- At discharge port/outside the

Customs Frontier Concern from LNG suppliers

Some suppliers look at CFR Model with invoicing on thebasis quantity unloaded

Taxation and Insurance issues

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CONTRACTUAL QUANTITIES

Annual Contract Quantity

Annual Quantity Deficiency (Make up Gas)

Upward Flexibility.

Make Good Gas.

Restoration Quantities.

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OTHER IMPORTANT COMMERCIAL ISSUES

Additional matters

Status of most favoured buyer

Change in circumstances

Provision of reopener

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LNG PRICING

LNG pricing is the most important clause in Sale PurchaseAgreements.

Success of contract largely revolves around the negotiatedLNG price for long term.

LNG price in Asia Pacific is largely linked with JCC crudebasket.

European buyers have LNG price linked with basket of crude products and gas.

New buyers prefer fixed price with minor variations

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LNG PRICE

Region Linkages

North America Domestic Gas (Henry Hub)

UK NBP

Europe Competing Fuels

(Heating Oil, Gas Oil,

Pipeline Gas)

Asia-Pacific Linked to Imported Crude

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TYPICAL LNG PRICE FORMULA

ASIA PACIFIC LNG FORMUALE

P = S x JCC + C

where,

P = Ex-ship price of LNG

JCC = Japan Custom Cleared Crude Oil, in $ / Bbl

C = Agreed constant

S = Slope

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LNG INDEXATION FORMULA Contd...

Traditional Japanese Formulas

LNGP

rice$/MM

BTU

Crude or JCC Values (US$/Barrel)

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LNG Formula with floor & Ceiling

LNGP

rice$/MM

BTU


Floor

Ceiling

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Lower Slope for JCC/Crude Price lower than A or Higher than

B. Higher Slope between A & B.

LNGP

rice$/MM

BTU


A

B

S Curve Indexation formulae

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Natural gas price in Europe and USA are market determinedbased on competing fuel price.

In USA Natural gas is indexed to Henry Hub gas price & in UKto NBP.

Well head price of natural gas is largely based on the demandsupply.

Transportation charges adjusted based on delivered competingprice of natural gas from other sources.

Seasonal variation in gas prices due to demand supply

Rates of gas vary with respect to the volumes.

GAS PRICING USA & EUROPE

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FUNDING & PAYMENT RISKS MITIGATION

Trust & Retention Accounts through which all cash flows of

Project Company are routed

Cash Flow Waterfall to Prioritize Payments

Debt Service Reserve Accounts for servicing debts in caseof short term cash flow mis-matches

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PAYMENT SECURITY STRUCTURE

Debt Service

Operating Expenses-- Fuel Costs- Approved O&M Costs

Taxes & Duties


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Thank You

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lng contract structure

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