Post on 01-Sep-2019
Bangladesh LNG Update: FSRU Import Projects
kslaw.com
SEPTEMBER 2017
How to structure LNG FSRU projects and navigate key legal and regulatory issues in Bangladesh
1. http://www.worldbank.org/en/results/2016/10/07/bangladesh-ensuring-a-reliable-and-quality-energy-supply 2. http://www.lngworldshipping.com/news/view,asias-2030-lngdemand-prospects-the-highs-and-the-lows_44614.htm 3. https://www.reuters.com/article/us-bangladesh-power-lng/bangladesh-lng-drive-likely-to-hit-its-diesel-fuel-oil-demand-idUSKBN19R0R5
Of Bangladesh’s installed electricity capacity, 63% is from
gas-fired plants.3 Bangladesh is currently able to supply
approximately 2,700 mmcf/d of gas from various domestic
gas fields and according to Bangladesh Oil, Gas and Mineral
Corporation (“Petrobangla”), there is a shortfall of around
700 to 800 mmcf/d. With Bangladesh’s gas reserves
depleting and the discovery of new gas fields in Bangladesh
decreasing (the last gas field was discovered in 2014), the
GOB initiated a project to import LNG from Qatar in 2010.
Now, seven years later, Bangladesh’s first LNG import
terminal is under construction and set to come online in 2018.
Bangladesh is becoming an increasingly hot topic in the
Asian LNG sector, with six agreements and memoranda of
understanding (MoU) having been signed for LNG import
terminals and additional expressions of interest (EoI)
issued for further terminals. We have set out below our
understanding of the current LNG import projects planned
in Bangladesh.
King & Spalding is advising Summit Corporation Limited on
the second LNG import project in Bangladesh, as well as a
potential supplier to another LNG (FSRU) import project.
Read “King & Spalding Advises Summit Corporation on New
Bangladesh LNG Import Terminal” kslaw.com/news-and-
insights/king-spalding-advises-summit-corporation-on-new-
bangladesh-lng-import-terminal.
We understand how to structure LNG projects of this nature
and how to navigate some of the legal and regulatory issues in
Bangladesh. In this report, we set out five key issues to consider.
The Need for Power
A decade ago, less than 50% of the Bangladeshi population
had access to electricity; today that figure stands at 78%. This
underlines the impressive progress made by the Government
of Bangladesh (the “GOB”) in achieving its goal of providing
power1 to all its citizens, which it aims to do by almost doubling
power capacity to 24,000 MW by 2021.1 The Oxford Institute
of Energy Studies (OIES), which has studied the high and
low growth scenarios for LNG imports to Asia, predicts that
Bangladesh could be importing up to 18.8 MTPA by 2030.2
1 KING & SPALDING
1. PROJECT DOCUMENTATION
The Moheskhali Floating LNG (FSRU) Project (“MLNG”) and the
Summit LNG FSRU LNG Import Terminal (“SLNG”), were awarded to
Excelerate Energy and Summit Corporation, respectively, on a build,
own, operate, transfer (“BOOT”) basis for a 15 year term. Summit has
entered into a long-term charter party agreement with Excelerate
Energy for the provision of an FSRU vessel to the SLNG project.
The key project documents for the projects are: (i) the
Implementation Agreement (the “IA”), to be entered into between
the GOB and the project company (“Project Co”); and (ii) the
Terminal Use Agreement (the “TUA”), to be entered into between
Petrobangla and Project Co. The IA maps out the GOB’s and
Project Co’s rights and obligations towards each other and
includes the GOB’s authorisation for the LNG terminal and a
government guarantee with respect to Petrobangla’s obligations.
The TUA sets forth Project Co’s obligations with respect to the
construction, ownership and operation of the LNG terminal and
Petrobangla’s purchase of regasification services from Project Co.
When negotiating the project documentation, it is fundamental to
the viability of the project to ensure that all of Project Co’s rights and
obligations under the IA and TUA are, to the fullest extent possible,
aligned with its (and the FSRU provider’s and contractor’s) rights
and obligations under the FSRU time charter party agreement
(“TCP”) and the pipeline EPC contract(s). Failure to do so could
result in Project Co being in material non-compliance of the IA and
the TUA, which in some cases may lead to termination of the project
and forfeiture of the FSRU and fixed infrastructure.
2. TERMINAL TRANSFER REGIME
The IA and the TUA each set forth a detailed procedure with respect
to (i) the transfer of the terminal to the GOB / Petrobangla at the end
of the term of the project and (ii) for early termination of the project,
including extensive FSRU transfer mechanics. It will be important
to ensure that a suitable transfer regime is agreed upfront with the
FSRU provider and that a detailed vessel transfer procedure is set
forth in the TCP, particularly given the technical and operational
nature of the services required to be provided.
The sponsors will also need to consider how the value of the
FSRU and fixed infrastructure is to be calculated on transfer.
At a minimum, the value of the FSRU upon transfer to the
GOB or Petrobangla should reflect the valuation set out (on a
depreciation basis) in the IA, but there may be additional project
costs or margin which the project sponsors or FSRU supplier
would seek to recover under the TCP.
3. PASS THROUGH OF LIABILITIES
A fundamental issue for the sponsors to consider is the different
nature of the contractual liabilities faced by Project Co under the
IA and the TUA and the FSRU provider under the TCP. The scale of
penalties and damages potentially payable under the IA and TUA is
of a much higher magnitude than those payable under a TCP. Whilst
the sponsors will need to assess how to allocate liability for the
failure of multiple parties (GOB, Petrobangla, Project Co., FSRU
provider(s), EPC contractor(s)), an FSRU provider will in most
cases seek to limit its liability to events caused by its own failure,
i.e. the FSRU’s failure to perform the regasification services.
Liabilities under the project should be allocated appropriately
among the project participants, taking into consideration
which party is best situated to mitigate the risk. This may
entail requesting the FSRU provider to share certain IA/TUA
project risks. Alignment of all project risks will be particularly
important to project finance lenders who will want to ensure
that (as far as possible) Project Co is insulated from gas
supply failure or interruption risk, for example, by requiring
that Petrobangla is required to continue to pay for terminal
services under the TUA. Similarly, there may be certain
circumstances in which Project Co cannot continue to pay hire
payments under the TCP if it is not in receipt of payments from
Petrobangla / GOB under the TUA or IA, respectively.
BANGLADESH LNG UPDATE: FSRU AND OTHER LNG IMPORT PROJECTS 2
SEPTEMBER 2017
4. RESTRICTION ON OFFSHORE GUARANTEES
FSRU providers are likely to request that Project Co issues
credit support in favour of the FSRU provider (typically
in a form of a standby-letter of credit from a reputable
international bank) to cover Project Co’s hire payment
obligations under the TCP. However, Section 5 of the Foreign
Exchange Regulations Act of Bangladesh restricts any person
or residents of Bangladesh from creating any right in favour
of non-residents to receive payments outside of Bangladesh,
including in the form of a guarantee, without the prior
approval of the Central Bank of Bangladesh. For this reason,
a Bangladesh project company may find it difficult to give a
guarantee to the FSRU provider or EPC contractor if such
project company is not a Bangladesh entity: such risks will
need to be addressed in the TCP.
5. FORCE MAJEURE AND ENVIRONMENTAL CONDITIONS
Any misalignment between the force majeure provisions in
the IA and TUA, the TCP and other project documents may
create uncertainty as to whether Project Co can claim force
majeure in respect of events affecting the FSRU project. For
example, an event of force majeure under the downstream gas
supply arrangements should (in theory) trigger a force majeure
under the IA, TUA and TCP, as this will ensure that Project
Co is relieved from its obligations to continue to provide the
regasification services.
The environmental conditions of constructing and operating
a floating LNG terminal in Bangladesh should also be
considered. Bangladesh’s monsoon season runs from June
through to September and accounts for approximately 80% of
Bangladesh’s rainfall. For this reason, construction on the fixed
infrastructure of the LNG terminal will likely be suspended
for at least four months of a year and will need to be factored
into project timelines. In addition, project feasibility studies
and technical studies for the FSRU and its mooring will be
fundamental to the success of the project.
3 KING & SPALDING
SEPTEMBER 2017
Richard Nelson PartnerOil & Gas
Singapore: +65 6303 6092Mobile: +65 9759 0450rnelson@kslaw.com
Zoë Joy Bromage
AssociateOil & Gas
Singapore: +65 6303 6088zbromage@kslaw.com
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