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Considerations in Gas Contracts Using LNG Supply

Texas Utility Lawyers Association

October 13, 2005Craig Enochs

Jackson Walkter L.L.P.

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I. Introduction Times they are a changin.’

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II. Basic Differences between LNG and traditional North

American Gas Supplies

A. Transportation

B. Scheduling

C. Force Majeure

D. Remedies

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II. Basic Differences between LNG and Traditional North American

Gas Supplies

A. Transportation 1. LNG – liquefaction to ship to degasification.

Liquefaction Ship Regasification

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II. Basic Differences between LNG and Traditional North American

Gas Supplies

A. Transportation 1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

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II. Basic Differences between LNG and Traditional North

American Gas Supplies

A. Transportation 1. LNG – liquefaction to ship to degasification.2. Traditional – pipeline

B. Scheduling

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II. Basic Differences between LNG and Traditional North

American Gas Supplies

A. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling 1. LNG – Scheduling based on the timetable for a ship to travel to a gas import

facility.

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II. Basic Differences between LNG and Traditional North

American Gas Supplies

A. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling

1. LNG – scheduling based on the timetable for a ship to travel to a gas import facility

2. Traditional – scheduling based on pipeline capacity

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II. Basic Differences between LNG and Traditional North

American Gas Supplies

A. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling

1. LNG – scheduling based on the timetable for a ship to travel to a gas import facility

2. Traditional – scheduling based on pipeline capacity

C. Force Majeure

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II. Basic Differences between LNG and Traditional North

American Gas SuppliesA. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling

1. LNG – scheduling based on the timetable for a ship to travel to a gas import facility

2. Traditional – scheduling based on pipeline capacity

C. Force Majeure

1. Risk calculations are altered, with some risks increased and some decreased

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II. Basic Differences between LNG and Traditional North

American Gas Supplies

A. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling

1. LNG – scheduling based on the timetable for a ship to travel to a gas import facility

2. Traditional – scheduling based on pipeline capacity

C. Force Majeure

1. Risk calculations are altered, with some risks increased and some decreased

D. Remedies

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II. Basic Differences between LNG and Traditional North American Gas Supplies

A. Transportation

1. LNG – liquefaction to ship to degasification.

2. Traditional – pipeline

B. Scheduling

1. LNG – scheduling based on the timetable for a ship to travel to a gas import facility

2. Traditional – scheduling based on pipeline capacity

C. Force Majeure

1. Risk calculations are altered, with some risks increased and some decreased

D. Remedies

1. The remedies available if seller fails to deliver may be inadequate

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III. Analysis

A. Transportation

B. Scheduling

C. Force Majeure

D. Adequacy of Remedies

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III. Analysis

A. Transportation

1. Traditional gas assumes pipelines will be used.

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III. Analysis

A. Transportation

1. Traditional gas assumes pipelines will be used.

2. LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.

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III. Analysis

A. Transportation

1. Traditional gas assumes pipelines will be used.

2. LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.

3. Mixed bag.

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III. Analysis

B. Scheduling

1. Traditional Gas – scheduling flexibility

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III. Analysis

B. Scheduling

1. Traditional Gas – scheduling flexibility

2. LNG – limited ability to change scheduling

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

2. Decreased risks from use of LNG

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

2. Decreased risks from use of LNG

3. Obligation to replace

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

a. Additional governmental regulation from country of export

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

a. Additional governmental regulation from country of export

b. Isolation of supply due to concentration of supplies in a single ship

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

a. Additional governmental regulation from country of export

b. Isolation of supply due to concentration of supplies in a single ship

c. Inability to reroute transportation if the ship becomes unavailable

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

a. Additional governmental regulation from country of export

b. Isolation of supply due to concentration of supplies in a single ship

c. Inability to reroute transportation if the ship becomes unavailable

d. Uncertainty as to which ship a certain transaction is sourced from

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III. Analysis

C. Force Majeure

1. Increased risks from use of LNG

a. Additional governmental regulation from country of export

b. Isolation of supply due to concentration of supplies in a single ship

c. Inability to reroute transportation if the ship becomes unavailable

d. Uncertainty as to which ship a certain transaction is sourced from

e. Expanded geography

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III. Analysis

C. Force Majeure

2. Decreased risks

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III. Analysis

C. Force Majeure

2. Decreased risks

a. Immune to pipeline breakdowns, ruptures, or malfunctions

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III. Analysis

C. Force Majeure

2. Decreased risks

a. Immune to pipeline breakdowns, ruptures, or malfunctions

b. Immune to many weather events affecting traditional supplies

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III. Analysis

C. Force Majeure

3. Obligations to replace

a. If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure?

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III. Analysis

C. Force Majeure

3. Obligations to replace

a. If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure?

b. NAESB is unclear as to whether the seller is obligated to replace.

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III. Analysis

C. Force Majeure

3. Obligations to replace

a. If the delivery point is a pooling point or hub and an event of force majeure affects a seller’s supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure?

b. NAESB is unclear as to whether the seller is obligated to replace.

c. May be prudent to specify whether the seller has the obligation to replace.

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III. Analysis

C. Force Majeure

4. Adequacy of remedies

a. Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

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III. Analysis

C. Force Majeure

4. Adequacy of remedies

a. Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

b. LNG – If the delivery point is the tailgate of the regasification facility, it will be appreciably more difficult to obtain alternate supply.

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III. Analysis

C. Force Majeure

4. Adequacy of remedies

a. Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

b. LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply.

c. Specific performance.

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III. Analysis

C. Force Majeure

4. Adequacy of remedies

a. Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

b. LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply.

c. Specific performance.

1.) Without specific performance, the buyer may not have an adequate remedy if the LNG seller fails to deliver.