COURSE ON LNG

BUSINESS
Session-5
Gas/LNG contracts- basic
principles in their formulation
LNG value chain linkages

Gas producer Pipeline User 1

Gas seller
Pipeline User
Regas terminal

LNG plant Shipping User n

 What is a Contract?
 Contract is a document which contains legally
binding rights and obligations of Parties which
are signatories to the Contract
 Contracts are required to be carefully drafted in
gas business to ensure proper risk mitigation in
a value chain (balancing of rights and
obligations under different contracts)
 Proper drafting of Contracts is very necessary
for ensuring financial closure of various projects
in LNG/ Gas value chain
 Typical Objectives of Contract
 To ensure supply security (Quantity, Quality and duration
of supply)
 To define pricing or valuation principles and formulae in
unambiguous terms (linkage to various references and
the manner in which they are to be used)
 To understand and ensure compliance to the
requirements of Laws (especially when it involves
Parties in different countries)
 To clearly define events of Default and the remedies to
cure events of Default
 To clearly define the flexibilities required in fulfilling the
obligations
 To clearly define mechanisms for Dispute Resolution
 To define limits of Liability
 Basics of Contract formulation
 To identify the basic objectives and requirements
of proposed Contract
 To understand the interphases involved between
different Parties involved to fulfill the desired
objectives
 To identify the risks involved or events which
could jeopardise the fulfillment of desired
objectives
 To involve a Lawyer and explain to him the
technical and commercial requirements of the
Contract (as per your defined objectives) and
ask him to draft the document by understanding
the applicable Laws to all Parties concerned.
 Basics of Contract formulation
 Have absolute clarity about objectives
 Ensure unambiguous wordings
 Contract is a long term relationship and it
needs to be sustainable.
 Hence do not try to be too smart and have
one sided agreement.
 Try to be fair in negotiating various
provisions of contract so long as it does
not compromise your basic objectives.
 What does Contract contain?
 Agreed performance amongst Parties
 Agreed methods and manners of
measuring/determining the performance
parameters
 Detailed procedures to be followed for each
perfomance
 Consequences of failures to achieve
performance
 Detailed procedures to be followed for seeking
remedies against failures of performance
 Typical Gas Contract Heads
 Preamble
 Definitions
 Sale and Purchase
 Term
 Commissioning and initial supply date
 Conditions precedent
 Facilities description and maintenance
 Quantity
 Annual programme and Nomination procedure
 Delivery pressure, temperature
 Quality
 Measurement procedures
 Typical Gas Contracts Heads
 Price
 Billing and payments
 ‘Take or pay’ provisions and LDs
 Dispute resolution mechanism
 Force Majure
 Warranties and indemnities
 Termination
 Assignment
 Miscellaneous
 Preamble
 Describes Parties and their legal status,
registered office etc.
 Gives date of signing
 Describes the background and each
Party’s intent with which this contract has
been developed
 Definitions
 Defines various terms and meaning thereof specifically
for the Contract interpretation
 Whenever a defined term under definition is used with
capital letters in the text of the contract it is to be
interpreted as per the definition
 Hence it is a very important section though it appears to
be very simple
 Definitions are generally brushed up by the Lawyers
after the Contract draft has been prepared
 Some of the important definitions are Delivery related eg.
Delivery Point, period, rate etc. Others could be Day,
Month, Year, Certain defined periods (say Recovery
Period, Cure Period etc.), related Quantities, Due dates,
Effective Date, Buyer’s/Seller’s Facilities,
Specification/Off spec. gas
 Manner of interpretation
 Sale and Purchase
 Seller agrees to sell and Buyer agrees to
buy and pay for Gas as per terms of
Contract
 Talks about transfer of risk and title to gas
at Delivery Point
 Term
 Defines duration for which Contract is valid
from Effective Date
 Provisions for extension of Term based on
certain agreed procedure and, normally,
mutual agreement to do so.
 Certain automatic extensions in case of
certain Recovery Period related
obligations
 Commissioning and initial supply
date
 Normally a Target Date is set for initial supplies or a
window of commencing supplies, after a defined period
from Effective Date, is agreed upon
 Parties agree to take various steps to implement their
respective facilities and keep each other informed
 Based on the progress in implementation Parties may
agree to decide exact date of initial supplies in the
agreed window
 There would be agreed process of communication and
Parties would agree to certain testing and
commissioning process
 Consequences of any party failing to implement in time
would be specified
 Conditions precedent
 Parties agree to achieve certain milestones
before the Contract becomes effective.
 All parties list events/milestones
 Parties agreed on a procedure to inform each
other about achieving milestones
 Parties may also agree to have right to waive the
requirement of fulfilling milestones for
agreement to be effective
 If these conditions are not fulfilled in certain
agreed time period, there may be provision for
Terminating the Contract
 Facilities description and
maintenance
 Facilities required to be created by all parties are
specified
 Interphases in facilities for achieving specified
performances are clearly specified
 Obligation to follow reasonable and prudent practices in
operations and maintenance
 Obligation to provide access for inspection
 Specifying planned maintenance requirements and
period thereof (e.g. dry docking of ship, statutory
inspections, preventive maintenance). If there are
multiple trains there may be reduced buy/sell quantities.
 Specify procedure for deciding planned maintenance
period and obligation to make efforts to coincide planned
maintenance of all parties
 Provisions for unplanned and emergency shut downs
and consequences thereof