Energy November 2014 THE LNG SALE AND …

1 Energy November 2014 THE lng sale and PURCHASE. AGREEMENT: GETTING TO GRIPS WITH THE EMERGENCE OF. SINGAPORE'S Energy MARKET? Since the opening of Singapore's first the start of the contract process, as the question Liquefied Natural Gas (LNG) terminal in May of delivery has an important bearing not only on 2013, the city state has been set to become the apportionment of risk during transit and in a regional LNG hub, and the LNG market a ensuring that facilities at the receiving terminal major economic driver for the Singaporean may be adequate, but also to the question of title economy. Providing a means of transporting to the cargo as well. Consideration should also be natural gas over long distances when given to the degree of cover provided for by each pipeline transportation is not feasible, the parties' insurance, specifically ensuring there is growth in Singapore's LNG trade is a game- adequate cover in place to deal with, in particular, changer for not only industry practitioners, the event of an accident caused by the delivery but the legal community.

2 Vessel's negligence, or due to adverse weather conditions, often an issue in some of the more Consequently, the lng sale and purchase remote production areas. agreement brings with it a unique set of challenges and considerations, which can be the The buyer in an LNG sale agreement should also source of additional difficulty to those interested exercise caution when entering any agreement in becoming involved in this growing industry. This to on-sell the LNG, paying particular attention to Briefing identifies the key features of an LNG sale their exposure to liability for failing to deliver the and purchase agreement, and considers some of LNG, despite the problem being outside of their the issues connected to it that the advisers must control. In order to avoid this situation, the buyer be aware of.

3 Should consider including express provision for the recovery of lost profits from the subsequent Risk and delivery sale of the LNG directly from the seller. It is not infrequent in LNG sale agreements for the delivery point to become an area of dispute in negotiations, often a result of the parties' failure to agree at the original time of contracting whether delivery is to take place at the loading terminal or the receiving facility. It is important to settle this at Dispute resolution and jurisdiction Adjustment mechanisms An LNG sale agreement is likely to also incorporate a price review clause, in Referred to as midnight-clauses', the The sale and carriage of LNG is which case it is necessary to be aware provisions regarding dispute resolution subject to a number of factors, which of the criteria for determining whether and jurisdiction are frequently last may be difficult to control, such as there shall be an increase.

4 If it is simply minute additions to the lng sale and the weather, availability of vessels or the parties seeking to agree on a new purchase agreement. Commercial receiving and storage terminals, and price, will the status quo prevail if there parties, particularly those involved in adjustment mechanisms should be put is no agreement? Can market rates/. the Energy trade, generally prefer to in place to allow for the likely delays conditions be taken into account? Both think of the rewards of partnerships or complications without the problem parties should consider the application rather than the risks connected to its escalating to a dispute. Parties should of any economic hardship' principles breakdown. Accordingly, parties to an be careful to note what their rights are to the agreement by the local law.

5 LNG agreement are often surprised to vary the annual delivery programme, at the effects of these clauses, and in the event that they are unable to Force majeure commonly complain that what is meet any obligations, and consider recorded in the agreement does whether account should be taken of LNG sale agreements almost not seem to match their original weather delays or capacity issues universally include force majeure expectations. relating either to LNG availability or provision, which have the effect the capacity to transport or receive it, of suspending or terminating the Often, the choice of governing law and which require the purchaser to vary agreement upon the occurrence of one the rules for resolving any disputes, the volumes of LNG which they have of a range of listed events which would as well as the method and venue agreed to purchase.

6 Generally render performance of the in which the dispute will be heard, agreement practically or commercially are not properly considered, leading Typically, the seller will want to impossible. It should be noted however to a situation which may be wholly commit the buyer to take or pay that no two force majeure clauses are unsuitable to one of the parties. This is arrangements, in which the buyer the same, and careful thought should an unwelcome complication when the pays for all of the LNG it has agreed be made to which events are to be parties are already in a state of dispute. to purchase, even if it declines or included as force majeure. Should is unable to take delivery of the adverse weather be included? Civil It is recommended that, before full quantities.

7 A buyer in these unrest? The nature of the LNG trade entering into any LNG transaction, circumstances may want to have and the typical production locations both parties consider whether they are the right to take delivery of volumes make it hard to predict what exactly truly comfortable with the agreement's in a subsequent contract year, if for can go wrong, so it is therefore chosen law and accept the risk of any example there is a natural disaster or important to draft a suitably wide challenges which may arise from the other commercial circumstance which spectrum of listed events into the choice of venue for court proceedings would justify this. This will of course agreement's force majeure provision. or arbitration. Ambiguous jurisdiction have a significant effect on the seller's and dispute resolution provisions are delivery programme, which will have to Singapore's LNG aspirations frequently used against a claim to be planned well in advance.

8 Phase Three' begins for extend proceedings, escalate costs, Singapore's Jurong Island Terminal challenge enforcement or otherwise In addition to the delivery schedule, pressure a claiming party to settle, and adjustment mechanisms commonly At the end of August, it was announced that the Singapore LNG. so careful consideration ought to be exist for the contract quantity to be Corporation (SLNG) had awarded afforded to their drafting. varied. Both parties should be aware Samsung C&T rights to the US$542. of any rights the buyer may have to Precisely because of the importance of million engineering, procurement and reduce the annual quantity which it is relationships in the LNG trade, it may construction project (EPC) to expand required to take, or of any rights the also be sensible for the agreement to Singapore's first LNG terminal, with a seller may have to vary this for its own completion date set for 2018.

9 Initiating specify a window, before any formal convenience, and whether there is any dispute resolution proceedings take Phase Three' of Singapore's ambitious subsequent obligation to later make LNG storage extension programme, place in which representatives of the this up. this new project aims to expand the parties involved can attempt to resolve terminal's send-out capacity from the matter in dispute. 02 Energy Moving forward, and further to Singapore's efforts to move away from oil to gas and reduce emissions, the Singaporean government has announced plans to supply LNG to fuel ships by 2020, beginning with a pilot programme in early 2017 which will involve funding up to six LNG-fuelled vessels at up to US$2 million per vessel. 6 Mtpa to 11 Mtpa by adding a fourth the SGX CEO, Magnus Bocker, as an LNG storage tank and additional important event for SGX.

10 Regasification facilities to the existing terminal. With a capacity of 260,000 Andrew Kruglov, Deputy Chairman of cubic meters, the new storage tank the Gazprom Management Committee will be the fourth largest in the world and head of its Department for Finance and have the ability to fully store cargo and Economics, further hailed the from a Q-Max carrier, according to the move as a key milestone in Gazprom's SLNG. history and further demonstrates the importance of Singapore, and the Asia- This most recent EPC project Pacific region, for Gazprom's business continues the nation's already and future strategy.. significant efforts to boost its LNG. profile by investing in its infrastructure Moving forward, and further to and technology. Breaking into the LNG Singapore's efforts to move away market with the terminal's opening in from oil to gas and reduce emissions, May 2013, the well-established hub the Singaporean government has has since received 32 LNG vessels announced plans to supply LNG to delivering more than million metric fuel ships by 2020, beginning with a tonnes of LNG to Singapore.