4

0baptor 2
Asburst LLP
F|oat|ng LNC Pogas|f|cat|on:
Loga| !ssuos
!ntroduct|on
Anthony Patten, a partner at Ashurst London, considers the
increasing popularity within the LNG industry of floating
regasification and the specific issues which need to be considered in
respect of the long-term lease or charter of a floating storage and
regasification unit.
LNG (liquefied natural gas) is formed by the cooling of natural gas
to -163C (-260F), resulting in its condensation and conversion
into a liquid. Liquefaction causes a significant reduction in
volume
1
, meaning that LNG can be transported much more cost-
effectively over longer distances than natural gas via utilisation of
purpose-built road tankers, railway tankers and LNG carrier ships.
On arrival at an unloading destination, the LNG is regasified for
distribution to the end-user. If the LNG has been transported via an
LNG carrier ship (an LNGC), a floating storage and
regasification unit (FSRU) allows regasification to be undertaken
offshore. Specifically, an LNGC moors alongside the FSRU and
unloads its LNG cargo into tanks onboard the FSRU for storage
prior to its passage through the FSRUs onboard regasification
system. The regasified natural gas is then piped to shore for onward
distribution to the end-user via the existing gas pipeline network.
Po||anco on F5PUs |n Today's LNC Markot
The worlds first FSRU based on conversion of an existing LNG
vessel commenced operation in Pecem, Brazil in January 2009.
Chartered by Petrobras from Golar LNG Limited (Golar), the
conversion of the Golar Spirit (a 1981-built ship) into an FSRU was
completed in June 2008. While primarily intended to provide
storage and regasification services, Golar Spirit has also retained its
ability to operate as an LNGC. In contrast, other FSRUs forsake
this flexibility and are, instead, designed to remain permanently
moored at the LNG unloading port (other than for relocation due to
drydocking or in emergency circumstances). Currently, a number
of other FSRU (or similar) projects are ongoing including:
the long-term charter by Petrobras of a second FSRU from
Golar, which is intended to be moored in Rio de Janeiro,
Brazil. The FSRU was constructed by conversion of the
LNGC Golar Winter (completed Q2 2009) and will retain the
flexibility to operate as a LNGC;
the utilisation of shuttle and regasification vessels (SRV)
in the Gulf of Mexico Gateway Scheme and the Teesport
Project (Teesside, UK). An SRV is a form of intermittent
FSRU as it operates as a shuttle vessel which serves both as
an LNGC and, on arrival at the unloading destination, an
LNG regasification plant;
the long-term charter by the Dubai Supply Authority of an
FSRU from Golar. The FSRU will be constructed by
conversion of the LNGC Golar Freeze and will be moored at
Jebel Ali Port, Dubai. Golar Freeze will remain classified as
an LNGC, but is intended to be used only for FSRU service
and will be permanently moored at Jebel Ali Port;
the purchase from Golar by OLT Offshore LNG Toscana
S.p.A. (OLT) (a joint venture company of which E.ON and
Iride are the major sponsors) of the LNGC Golar Frost, for
subsequent conversion into an FSRU, which is to be
permanently moored at OLTs offshore LNG terminal in
Livorno, Italy (delivery of the FSRU is scheduled for the
second half of 2010); and
the charter by Kuwait Petroleum Corporation of a
regasification vessel from Excelerate Energy, which will be
stationed at the existing Mina Al-Ahmadi jetty facility in
Kuwait and form the basis of Kuwaits first LNG import
terminal.
Interest in FSRU utilisation is increasing as parties seek to take
advantage of the associated benefits (please refer to table 1). With
this in mind, summarised below are the main issues which parties
should consider when negotiating the long-term lease or charter of
an FSRU (please note that our commentary assumes an arms length
charter hire relationship between owner and charterer, being one
where the owner does not have an equity stake in the receiving gas
terminal).
!0LC TD: CA5 PECULAT!DN 2010 WWW.!0LC.0D.UK
~ Pub|shed and reproduced wth knd permsson by C|oba| Lega| Croup Ltd, London
Antbony Patton
Table 1 - Potential benefits of FSRU projects
Potentially lower costs than on shore LNG regasification terminals, with
quicker development time.
Flexibility of location - an FSRU is a converted LNG vessel and can therefore
be relocated if necessary.
More simplified decommissioning than onshore LNG regasification
terminals.
Ability to meet seasonal peaks in gas demands.
Extension of life for ships converted into an FSRU.
Ability to meet a shortfall in gas production during an interim period, e.g.
while a permanent energy production facility is being constructed.
Ability to access rapidly high-value gas markets.
Decreased construction and delivery risk for the host country (although
consideration must be given to the potential repercussions for the host country
if delivery of the FSRU is delayed).
Potential reduction in carbon dioxide emissions - commentators believe
that use of an FSRU may result in increased burning of gas rather than diesel
for energy generation, which, in turn, will significantly reduce carbon emissions.
WWW.!0LC.0D.UK
5
Asburst LLP F|oat|ng LNC Pogas|f|cat|on: Loga| !ssuos
!0LC TD: CA5 PECULAT!DN 2010
~ Pub|shed and reproduced wth knd permsson by C|oba| Lega| Croup Ltd, London
!ssuos for 0ons|dorat|on |n tbo Long-torm
0bartor of an F5PU
T|m|ng of transact|on
Typically, a long lead time follows execution of an agreement for
the long-term charter of an FSRU. This is because construction of
an FSRU or conversion of an LNGC into an FSRU is both time-
consuming and costly, thus generating significant capex costs for
the owner which are not typically incurred on a speculative basis.
Form of agroomont
The form of agreement typically used for the charter of a ship is a time
charter party (TCP). Depending on whether the FSRU is to be
permanently moored or is to retain its flexibility to operate as an
LNGC, an FSRU project may adopt characteristics of: (i) an LNGC;
(ii) a land-based regasification facility; and/or (iii) an offshore floating
crude oil storage or production unit. One may therefore need to
consider issues deriving from each of these types of project.
2
0bartor b|ro
Commencement date. Consideration must be given to the
date upon which the FSRU is deemed to be on-hire and,
thus, from which charter hire is payable. Specifically, the
owner will want to ensure that charter hire is due from the
date the FSRU is delivered in accordance with the owners
obligations under the TCP. This may be the date that the
FSRU is actually delivered at the unloading port or, if the
charterer is unable to accept delivery, a deemed delivery
date. Conversely, the charterer will want to ensure that
payment of full charter hire only commences as and when the
FSRU is delivered in accordance with the contracted
specification.
Terms of charter hire. The charter hire is typically a fixed
daily fee which is due if the FSRU is performing within
certain defined limits. The owner has no ability to manage
the extent to which the FSRU is utilised and should therefore
carry no risk in respect of underutilisation. However,
consideration should be given to what recourse is available to
the charterer if the FSRU is underperforming. Potential
recourse includes a proportionate reduction in the charter
hire and/or an extension of the charter hire period.
Creditworthiness of counterparties. As is the case with
other long-term contracts, consideration should be given
during TCP negotiations to the creditworthiness of each
party. The owner will primarily be concerned about the
charterers ability to pay the charter hire when due. If the
charterers creditworthiness is inadequate, a letter of credit
may be requested by the owner or, alternatively, the ultimate
parent company of the charterer (or a group company with
sufficient credit strength) may act as guarantor of the
charterers obligations. In contrast, the charterer will want to
ensure it is sufficiently protected in the event that the owner
fails to deliver the FSRU on time. Such protection may
include the payment of liquidated damages by the owner.
Force majeure. Although the occurrence of force majeure in
the LNG industry is relatively rare, the consequences can be
significant. Careful consideration must therefore be given to
the extent to which force majeure relieves a party from its
obligations under the TCP.
Scope of definition. Thought needs to be given to
whether the definition of force majeure includes an
exhaustive list of agreed force majeure events or a
more general definition (i.e. an event or circumstance
that is beyond the reasonable control of a party, acting
as a reasonable and prudent operator, and materially
and adversely affects the ability of a party to perform
its obligations under the TCP). An exhaustive list of
force majeure events does, arguably, offer more
certainty to the parties with respect to identifying
whether an event of force majeure has occurred, but is
dependent on each event being adequately defined and
the list of force majeure events being sufficiently
comprehensive.
Extent of force majeure. How far along the LNG
value chain should a force majeure event be permitted
to run? For example, should the charterer be
permitted to seek force majeure relief under the TCP
for a force majeure event affecting a downstream gas
buyer or upstream LNG supplier? Should the owner
be permitted to seek force majeure relief for a force
majeure event affecting the shipyard at which the
FSRU is being built? No definitive answers can be
given to these questions as the equitable solution may
largely depend on the relationships (if any) between
the various parties along the LNG value chain and,
ultimately, the level of control that the owner and/or
the charterer may have over such parties.
Relief. The occurrence of a force majeure event
typically relieves a party from performing its
obligations under an agreement and thus prevents that
party from being in breach. With respect to a TCP, the
primary obligations for which the parties will seek
relief are payment of charter hire (charterer) and
provision of services (owner). Consideration must
therefore be given to the extent to which relief is
granted and for how long. For example, should a
termination right accrue for the non-affected party
and/or the affected party after a prolonged period of
continuous force majeure?
Extension of term. If a force majeure event occurs,
should the charter term be extended by a period equal
to the duration of the force majeure event? Any such
extension may provide an opportunity for the charterer
to make good any shortfall in gas delivered to its
downstream gas buyer(s) during the force majeure
period or, alternatively, allow the owner to recoup any
shortfall in charter hire received. However, the
charterer must consider whether the supply contracts
under which it provides natural gas to its downstream
buyer(s) permit it to make good any such shortfall
and/or whether the contracts will remain in place during
the extension period. Conversely, the owner must have
regard to any future arrangements (i.e. post-charter
period) that are already in place for the FSRU.
Off-specification. An FSRU is designed to receive and
regasify LNG within defined specifications. Any LNG
received outside these specifications (Off-spec LNG) may
cause damage to the regasification unit. An FSRU is also
designed (and typically contracted) to produce natural gas
within defined specifications - gas not falling within these
specifications (Off-spec Gas) may be unacceptable to the
downstream gas buyer and, potentially, cause damage to the
receiving gas network while exposing the charterer to a claim
for damages. Consideration must therefore be given to what
recourse should be available to the owner and charterer for
accepting delivery of Off-spec LNG and Off-spec Gas
respectively. Options include:
a right for the receiving party to refuse to accept
delivery of the Off-specification product;
a reduction in charter hire if Off-spec Gas is delivered;
and
6
Asburst LLP F|oat|ng LNC Pogas|f|cat|on: Loga| !ssuos
!0LC TD: CA5 PECULAT!DN 2010 WWW.!0LC.0D.UK
~ Pub|shed and reproduced wth knd permsson by C|oba| Lega| Croup Ltd, London
granting of an indemnity to: (i) the owner for any costs
incurred in cleaning or remedying the FSRU and/or
venting the Off-spec LNG; and (ii) the charterer for
loss suffered as a result of unknowingly accepting
Off-spec Gas (e.g. inability to fulfil contractual
obligations to its downstream gas buyer(s)).
Regulatory concerns. Consideration should be given to
what regulatory permits, licences and other forms of consent
(together, Permits) are required for mooring and operating
the FSRU at the unloading port. This requirement will vary
depending on the country in which the unloading port is
located. Sufficient time and resource must be dedicated to
ensuring all Permits are secured prior to the FSRUs arrival.
Furthermore, the TCP should expressly state which party is
responsible for securing the Permits. Typically, a distinction
is drawn between those Permits necessary for FSRU
mooring and operation, which are for the owners account,
and those Permits required for construction and operation of
the LNG terminal and mooring platform, which are for the
charterers account.
Third party access regimes. A further regulatory concern
which should be considered is the applicability of third party
access regimes. In various jurisdictions (such as in the EU),
local law requires the owner of certain infrastructure to make
available to third parties (on reasonably competitive or
regulated terms) some or all of that infrastructures capacity.
Consequently, the owner is prevented from awarding 100 per
cent of the infrastructure capacity to one party and, by
extension, an FSRU owner may be prohibited from
contracting 100 per cent of the nominal regasification
capacity to a sole charterer.
Liability and indemnity. The parties to a TCP should give
careful consideration to the liability regime which they wish
to rely on. The two options which typically underpin liability
regimes are:
guilty party pays, whereby one party (party A)
indemnifies the other party (party B) for any liability
incurred by party B as a result of the acts or omissions
of party A; and
mutual hold harmless (also known as knock-for-
knock), whereby one party (party C) is responsible
for and indemnifies the other party (party D) against
any liability incurred by party D which relates to
personal injury, illness or death of personnel
employed by party C (or party Cs affiliates) or
damage to property belonging to party C (or party Cs
affiliates) (and vice versa).
Consequently, the indemnity provided by party C is effective
even if liability accrues due to the actions of party D. The
parties may agree not to apply knock-for-knock principles
where the non-indemnifying party has committed gross
negligence or wilful misconduct. Arguably, the mutual hold
harmless approach allows for strict allocation of liability as
each party bears responsibility for its own property and
personnel (which responsibility it could ordinarily seek to
manage through insurance). In contrast, the guilty party
pays approach requires determination of fault and, thus,
scrutiny of the actions of each party, which may result in
dispute if the parties fail to agree. The parties should also
consider whether to exclude liability for consequential loss.
Permitting recovery of consequential loss potentially
exposes the parties to loss which may be difficult to foresee
at the time of entry into a TCP.
Rights of compensation for nonperformance. The ability
of a party to claim compensation for a counterpartys failure
to perform its obligations under an agreement is always an
area of focus during pre-contractual negotiations. With
respect to a TCP, the owners primary concern is to ensure
that the charterer continues to pay full charter hire in the
event of charterer default (e.g. failure by the charterer to
provide, operate and/or maintain a mooring berth for the
FSRU at the unloading port, failure to secure all necessary
permits, etc.). Conversely, the charterer will seek relief from
payment of the charter hire if the owner is in default (e.g. late
delivery of the FSRU). Furthermore, the charterer may seek
liquidated damages as a means of compensation for any loss
suffered under gas supply contracts with downstream gas
buyers.
Termination rights. To avoid future uncertainty, the
termination rights of each party to a TCP should be expressly
identified. Typical termination rights may include:
a right for the owner to terminate for non-payment of
charter hire. The daily charter hire is typically a
considerable amount, therefore the owner may require
a termination right after a short period of non-payment
to limit any compounding effect and, ultimately, its
financial exposure to the charterer;
a right to terminate for prolonged force majeure.
When considering if and/or when a termination right
accrues following a force majeure event, thought
should be given to, among other factors, how long the
force majeure event must continue prior to a
termination right accruing and which party the
termination right accrues to (i.e. non-affected party
only or both the affected and non-affected party);
a right for the charterer to terminate for prolonged late
delivery of the FSRU. Given that the charterer is
likely to have gas supply contracts in place with
downstream buyers, late delivery of the FSRU may
have significant consequences for the charterer. The
charterer may therefore seek a right to terminate the
TCP in such circumstances and negotiations are likely
to centre on what period of delay must pass before any
such termination right accrues;
a right for the non-affected party to terminate for
bankruptcy and/or commencement of insolvency
proceedings; and
a right for the charterer to terminate for loss (actual or
constructive) of the FSRU.
Endnotos
1 LNG is estimated to have less than 0.2 per cent of its original natural
gas volume.
2 Note that this article does not consider any specific marine law issues
(e.g. salvage, outbreak of war, additional war expense and New Jason
clauses), but such issues should be taken into account by all parties
during TCP negotiations.
F|oat|ng LNC Pogas|f|cat|on: Loga| !ssuos
WWW.!0LC.0D.UK
7
Asburst LLP
!0LC TD: CA5 PECULAT!DN 2010
~ Pub|shed and reproduced wth knd permsson by C|oba| Lega| Croup Ltd, London
Antbony Patton
Ashurst LLP
Broadwa|k House, 5 Appo|d Street
London EC2A 2HA
Unted Kngdom
Tc!: 44 2U ?oU 24b4
Iax: 44 2U ?bJ 2
ma!: anthcny.pattcn@ashurst.ccm
UPI: www.ashurst.ccm
Anthony Patten s a partner n the energy, transport and
nfrastructure department n London, speca|sng n corporate and
pro[ect deve|opment work n the o| and gas and wder energy
sectors. He has partcu|ar expertse n the upstream o| and gas and
LNC sectors, havng advsed c|ents on upstream deve|opments,
natura| gas |quefacton pro[ects, shppng and tradng and LNC
regasfcaton pro[ects across a wde range of [ursdctons, nc|udng
throughout the Mdd|e East.
Ashurst operates at the heart of the energy ndustry wor|dwde. Wth a g|oba| energy team of over 80 |awyers we can
assemb|e teams to provde the hghest qua|ty advce ta|ored to our c|ents' needs. We have he|ped hundreds of
companes, fnanca| nsttutons and governments dea| successfu||y wth cha||engng energy pro[ects by deve|opng
nnovatve so|utons.
0ur |awyers provde a comprehensve servce to the energy and natura| resources ndustry n the fo||owng areas.
Upstream o| and gas Ppe|nes
LNC Pefnng and petrochemca|s
Power Mnng
Penewab|es Water
Nuc|ear
We advse on a|| aspects of work n the energy ndustry.
Mergers, acqustons and corporate fnance Creenfe|d pro[ects
Pro[ect and acquston fnancng nternatona| |aw
Envronmenta| |aw Jont ventures
Commerca| agreements Ltgaton and arbtraton
Contact Ceoffrey Pcton-Turberv||, Head of Ashurst's C|oba| Energy Team.
Te|. 44 (0)20 7859 1209, Ema|. geoffrey.pcton-turberv||@ashurst.com