LNG Master Sales Agreement & Their Value in a Destination Flexible LNG Market - Steven Miles

Rome3 December 2007

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

Flexible LNG Market

Contract Risk Management Master ClassPresented by Steven R. Miles

Jason K. Bennett

CWC World LNG Summit (December 2007)

Introduction to Baker Botts' LNG Practice800+ 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


Introduction to Baker Botts' LNG PracticeSuccessful 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 GuineaAssisting 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 BrazilNegotiating Terminal Use Agreements and obtaining regulatory andenvironmental authorizations for U.S. receiving terminalsAssisting 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

Map of Baker Botts LNG Projects

Brazil:Pecem LNG TerminalRio de Janeiro

LNG Terminal

India:Dahej LNG Terminal Kochi LNG TerminalDahbol ProjectPipavav Project

NigeriaBonny LNGBrass LNG

Mexico:ProposedLNG Project

Peru:Peru LNG Project

Trinidad & Tobago:Atlantic LNG Project

Venezuela:Jose ProjectMariscal SucrePlatforma Deltana ProjectVLNG Project

Bahamas:Ocean Cay Project

Canada:Bear HeadCanaport LNG

Indonesia:Tangguh ProjectBontang Project

Dominican Republic:

Andres Project

Honduras:El Faro Project

JapanOsaka GasWestern Buyers

Equatorial Guinea:EG LNG Project

Puerto Rico:Ecoelectrica Project

Qatar:QatarGas 3 ProjectQatarEurope Project

United States Gulf Coast:Golden Pass LNG Terminal Pearl Crossing Project Pelican Project Vista del Sol LNG TerminalCameron LNG Project Freeport LNG ProjectCompass Port LNG Project Main Pass Energy HubBeacon Port Project Port Arthur LNG

United States - West Coast:Jordan Cove Energy ProjectKenai LNG ProjectNorthern Star LNG

United States - Northeast:Distrigas ProjectWeaver's Cove LNG Project

United States -Mid-Atlantic:

Cove Point LNGSparrows Point

United States - Southeast:Elba Island Project

Australia:Darwin LNG Project

China:Guangdong LNGFujian LNGZhejiang LNGUnited Kingdom:

Dragon LNG


Key Topics for DiscussionWorldwide 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?


Worldwide LNG Market ConditionsLNG 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


Worldwide LNG Market Conditions- Cont’dBuyers 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


LNG Project Value Chain

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.

Gas Production/ Liquefaction/ LNG Transportation/ Regasification/ Market/Pipeline LNG Marketing Interim LNG Storage Pipeline/ Gas Marketing

Gas storage Company


LNG Project AgreementsGas Production/ Liquefaction/ LNG Transportation/ Regasification/Pipeline Market/ Gas

Pipeline LNG Marketing Interim LNG Storage Gas Storage(?) Marketing Company

GSA SPA TCP TUA/TSA GSA

Transportation MSA SBC Transportation Gas MarketingAgreement Agreement Agreement

Liquefaction TransportationAgreement Services Gas Storage

Contract AgreementLiquids

Processing/Sales LNG Storage ShipperAgreement Agreement Cooperation

AgreementTLA

SchedulingAgreement

Financing Agreements


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


LNG Sale and Purchase Agreement Basics-Cont’d

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)


Overview of Master Sales AgreementsMSAs 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


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


Master Sales Agreements: How They Operate-Cont’d

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



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



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


Differences Between MSAs and SPAsTerm

Typical SPA: 20 yearsTypical 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 projectGas Supply and Gas Offtake: For an MSA, long-term supply of gas and viability of downstream markets are not issues


Differences Between MSAs and SPAs - Cont’dConstruction 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 issueForce 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


Differences Between MSAs and SPAs - Cont’dTake-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


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


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 necessaryCredit support and Force Majeure may become more important


Variations in MSAs: Consequences for Failure to Perform

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

Liquidated damagesActual damages

Buyer's performance obligations: Specifies the consequences for failure to take LNG

Take-or-pay with make-upTake-or-pay with mitigation sale creditLiquidated damages


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


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


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


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


MSAs in the Market: Destination FlexibilitySuppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing seasonal peaks in demand

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MSAs in the Market: Destination FlexibilitySuppliers might use MSAs to sell extra cargoes at higher prices to alternate destinations experiencing short term price differentials

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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 long-term SPAs, would an LNG spot market be more favorable to buyers or sellers?


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?


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


Thank You

Jason BennettBaker Botts L.L.P.2001 Ross Avenue

Dallas, TX 75201-2980

Tel: +1.214.953.6425Fax: +1.212.661.4425

Email: [email protected]

Steven R. MilesBaker Botts L.L.P.

1299 Pennsylvania Ave., NW Suite 1300Washington, D.C. 20004

Tel: +1.202.639.7951Fax: +1.202.585.1090

Email: [email protected]

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LNG Master Sales Agreement & Their Value in a Destination Flexible LNG Market - Steven Miles

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