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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