You are on page 1of 33

LNG Master Sales Agreements (MSAs) and their Value in a Destination Flexible LNG Market

Contract Risk Management Master Class Presented by Steven R. Miles Jason K. Bennett

Rome 3 December 2007

Introduction to Baker Botts' LNG Practice


800+ 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 2

Introduction to Baker Botts' LNG Practice


Successful 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 Guinea Assisting 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 Brazil Negotiating Terminal Use Agreements and obtaining regulatory and environmental authorizations for U.S. receiving terminals Assisting 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


CWC World LNG Summit (December 2007) Page 3

Map of Baker Botts LNG Projects


United States - West Coast: Jordan Cove Energy Project United States - Northeast: Kenai LNG Project Distrigas Project Northern Star LNG Weaver's Cove LNG Project United States Canada: Mid-Atlantic: Bear Head Cove Point LNG Canaport LNG Sparrows Point United States - Southeast: Elba Island Project Mexico: Proposed LNG Project Honduras: El Faro Project Dominican Republic: Andres Project Peru: Peru LNG Project Venezuela: Jose Project Mariscal Sucre Platforma Deltana Project VLNG Project Qatar: QatarGas 3 Project QatarEurope Project China: Guangdong LNG Fujian LNG Zhejiang LNG

United Kingdom: Dragon LNG

Bahamas: Ocean Cay Project Puerto Rico: Ecoelectrica Project Trinidad & Tobago: Atlantic LNG Project

Nigeria Bonny LNG Brass LNG

Japan Osaka Gas Western Buyers India: Dahej LNG Terminal Kochi LNG Terminal Dahbol Project Pipavav Project

Equatorial Guinea: Brazil: Pecem LNG Terminal EG LNG Project Rio de Janeiro LNG Terminal United States Gulf Coast: Golden Pass LNG Terminal Pelican Project Cameron LNG Project Compass Port LNG Project Beacon Port Project

Indonesia: Tangguh Project Bontang Project

Pearl Crossing Project Vista del Sol LNG Terminal Freeport LNG Project Main Pass Energy Hub Port Arthur LNG

Australia: Darwin LNG Project

Key Topics for Discussion


Worldwide 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 5

Worldwide LNG Market Conditions


LNG 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 6

Worldwide LNG Market Conditions- Contd


Buyers 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 7

LNG Project Value Chain

Gas Production/ Pipeline

Liquefaction/ LNG Marketing

LNG Transportation/ Interim LNG Storage

Regasification/ Pipeline/ Gas storage

Market/ Gas Marketing Company

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.
CWC World LNG Summit (December 2007) Page 8

LNG Project Agreements


Gas Production/ Pipeline Liquefaction/ LNG Marketing LNG Transportation/ Interim LNG Storage Regasification/Pipeline Market/ Gas Gas Storage(?) Marketing Company

GSA Transportation Agreement

SPA MSA Liquefaction Agreement Liquids Processing/Sales Agreement TLA

TCP SBC Transportation Services Contract LNG Storage Agreement

TUA/TSA Transportation Agreement Gas Storage Agreement Shipper Cooperation Agreement Scheduling Agreement

GSA Gas Marketing Agreement

Financing Agreements
CWC World LNG Summit (December 2007) Page 9

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 10

LNG Sale and Purchase Agreement BasicsContd


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 11

Overview of Master Sales Agreements


MSAs 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 12

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 13

Master Sales Agreements: How They OperateContd


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 14

Master Sales Agreements: How They OperateContd


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 15

Master Sales Agreements: How They OperateContd


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 16

Differences Between MSAs and SPAs


Term
Typical SPA: 20 years Typical 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 project Gas 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 17

Differences Between MSAs and SPAs - Contd


Construction 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 issue Force 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 18

Differences Between MSAs and SPAs - Contd


Take-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 19

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 20

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 necessary Credit support and Force Majeure may become more important

CWC World LNG Summit (December 2007)

Page 21

Variations in MSAs: Consequences for Failure to Perform


Seller's performance obligations: Specifies the consequences for failure to deliver LNG
Liquidated damages Actual damages

Buyer's performance obligations: Specifies the consequences for failure to take LNG
Take-or-pay with make-up Take-or-pay with mitigation sale credit Liquidated damages

CWC World LNG Summit (December 2007)

Page 22

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 23

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 24

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 25

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 26

MSAs in the Market: Destination Flexibility


Suppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing seasonal peaks in demand
NBP vs Nymex Gas Prices
14.00 12.00 10.00 $/mmBtu 8.00 6.00 Nymex 4.00 2.00 0.00
ay -0 5 Ju l-0 Se 5 p05 No v0 Ja 5 n06 M ar -0 M 6 ay -0 6 Ju l-0 Se 6 p06 No v0 Ja 6 n07 M ar -0 M 7 ay -0 7

IPE

CWC World LNG Summit (December 2007)

Page 27

MSAs in the Market: Destination Flexibility


Suppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing short term price differentials
Daily Henry Hub Price
20 18 16 14 $/mmBtu 12 10 8 6 4 2 0 Mar-02 Mar-03 Mar-04 May-02 May-03 May-04 Mar-05 May-05 Jul-02 Nov-02 Jul-03 Nov-03 Jul-04 Nov-04 Jul-05 Nov-05 Jan-02 Jan-03 Jan-04 Jan-05 Sep-02 Sep-03 Sep-04 Sep-05 Jan-06

CWC World LNG Summit (December 2007)

Page 28

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 longterm SPAs, would an LNG spot market be more favorable to buyers or sellers?

CWC World LNG Summit (December 2007)

Page 29

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 30

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 31

Thank You
Steven R. Miles Baker Botts L.L.P. 1299 Pennsylvania Ave., NW Suite 1300 Washington, D.C. 20004 Tel: +1.202.639.7951 Fax: +1.202.585.1090 Email: steven.miles@bakerbotts.com Jason Bennett Baker Botts L.L.P. 2001 Ross Avenue Dallas, TX 75201-2980 Tel: +1.214.953.6425 Fax: +1.212.661.4425 Email: jason.bennett@bakerbotts.com

CWC World LNG Summit (December 2007)

Page 32

LONDON WASHINGTON AUSTIN DALLAS HOUSTON NEW YORK

MOSCOW BEIJING RIYADH

DUBAI

HONG KONG

You might also like