Liquefied Natural Gas: The Law and Business of LNG

Citation

Bhattacharyya, S.C. (2007), "Liquefied Natural Gas: The Law and Business of LNG", International Journal of Energy Sector Management, Vol. 1 No. 2, pp. 206-210. https://doi.org/10.1108/17506220710761618

This is a timely edited volume that compiles essential legal and business information required to understand the LNG business. Written by gas consultants and legal specialists involved in the gas business, the volume is likely to prove to be a valuable practical guide for practitioners. The book would also be very useful for students who are interested in studying LNG and willing to learn about the different facets of the business, although the book has a less strict pedagogic style given its target audience.

The LNG business has undergone unprecedented changes over time and is transforming the gas business from its present regional boundaries to a global industry. The deregulation of electricity and gas markets in major consuming countries and the environmental concerns generally improved the prospects of gas trade. The rise in oil prices, decline in the domestic gas production in Europe and in the USA and consequent security of supply concerns have also changed the scenario. The constraints in the development of piped gas business, and the technological changes and cost reduction in LNG supply brought new opportunities for LNG bringing unprecedented growth in the market in recent times with huge investments being made in infrastructure development in Europe and North America. Increased interest in LNG and significant developments in the business transactions necessitate updated knowledge, which is not always available in a consolidated form to those outside the business despite having interest in these developments. The book fills this gap and makes a valuable contribution by providing an overall understanding of the LNG industry.

The book contains ten chapters. In the introductory chapter by the Consulting Editor Paul Griffin describes the exciting times of the LNG business and brings out the salient developments in the industry. The evolution of the business from long‐term contracts with rigid take‐or‐pay obligations and restrictions in supply destinations to more flexible spot and short‐term based trade and the consequent demand for re‐organisation of the business and the tensions in the transition period are explained by the author in this chapter.

Chapter 2 (contributed by Juan Marcano and Ramesh Raman of Taylor‐DeJong) is devoted to LNG trade in the Atlantic Basin, which is fast emerging as the major attraction for LNG trade due to growing demand in the region, including in the UK and the USA, high gas price forecasts, deregulated gas markets and the possibility of arbitrage by choosing the sales market. This chapter provides a brief overview of the emerging LNG attractions of the Atlantic Basin, the existing and potential supply positions, and the trends in the trade in this region. Changes in the market structure and the effect of such changes on the trade are also discussed.

The third chapter (contributed by Peter Roberts of Jones Day) considers the LNG supply chain and asks whether the evolution of the supply chain is enough to foster growth of the LNG business. Given that the LNG supply chain has a number of components and that no LNG supply project can be successful unless each component is strong and contributes to the overall project achievement, and because of the varying interests of the parties involved generate unequal emphasis which could breed conflicts of interests, the authors suggest that neglect of crucial areas such as securing buyers “to purchase the requisite volumes of LNG at an acceptable price and for the intended project duration” could be fatal for any LNG project. Although Traditionally LNG buyers and sellers have shared the responsibilities of the supply chain components, the allocation of responsibilities is changing as the gas market evolves and the market is deregulated in the consuming countries. Other changes include seller participation in the downstream activities, buyer involvement in the upstream activities, LNG re‐gasification by third parties on a fee basis, emergence of specialist shipping companies, relaxation of the destination clauses and more private participation in the entire chain. These changes pose new challenges to financing, add uncertainty and unpredictability to the business and make the LNG business prone to renegotiation and restructuring of contracts. At the same time the market evolution has allowed new entry and created a more dynamic market. The supply chain will play a valuable role in any analysis but its constitution would evolve depending on the changes in the surrounding environment.

Chapter 4 (by Susan Farmer of Watson, Farley & Williams) deals with LNG sale and purchase agreements and presents an overview of essential commercial and legal issues covered in such agreements. Capital intensiveness of the supply chain components coupled with lack of a captive market for gas traditionally required the suppliers and buyers to be tied to a long‐term commitment for facilitating the LNG development by imposing quantity obligations of the seller, buyer's obligation to take or pay for a minimum quantity, make‐up entitlement of the buyers and restriction on cargo destinations. The agreement also specified the gas pricing and price reviews, force majeure conditions and relief available in such cases, and other terms related to implementation and operation of the agreement (such as dispute resolution). But some of the traditional elements of the agreement are coming under review as the market changes. For example, recent agreements impose fewer restrictions on cargo destination and include arrangements for sharing the incremental benefits by different parties to the agreement. Although the author suggests that there is no model agreement and despite the fact the agreements are confidential documents, the readers would have benefited if a sample outline of a contract was either included in the volume or references were provided to source such a contract.

Chapter 5 (by Anthony Patten and Philip Thomson of Ashurst) is devoted to LNG trading, i.e. short‐term buying and selling of LNG. The short‐term market has grown from a non‐existent market before 1990s to 8 percent of the LNG trade in 2002 (which was equivalent to 218 LNG shipments in that year). This has happened because of the availability of short‐term cargoes arising as a result of default by long‐term buyers, early commissioning of projects or de‐bottlenecking of production capacities. Three different types of trading models have emerged: short‐term contracts, spot cargoes and swaps. This chapter explains these concepts and discusses the documentation required for short‐term transactions. While the focus of the chapter is from the perspective of transactions, the chapter would have benefited from some information on the developments of spot markets and spot prices. As the growth in LNG is closely related to the spot and short‐term market developments, the price and market movements are essential to any understanding of the LNG business.

LNG shipping is covered in Chapter 6 (by Clare Calnan and David Gardner of Curts David Garrard). Shipping being the link between the producer and the consumer and given the specialised nature of the LNG transport activity, LNG shipping has gained importance in the supply chain as the LNG business has grown in size. The potential bottlenecks in vessel capacity development, the possibility of a small group of owners controlling the market and the effect of changing LNG market on the shipping business add importance to this subject. The chapter starts with a brief review of the historical developments of LNG shipping and presents the technical changes observed in this segment of the industry. It then discusses the terms of purchasing, financing and chartering of LNG ships and presents the essential contractual arrangements followed in each case.

Chapter 7 covers another important area – that of financing LNG projects (by Stuart Salt of Linklaters). Although each project tends to have its own financial structure, external project‐level debt financing gained currency because of the size of the LNG projects and the involvement of strategic partners as well as the appetite of lenders for sound projects. As the funding can come from various sources, a Common Terms Agreement (that specifies the financing terms commonly applicable to each financier) and a separate Inter‐creditor Agreement (that provides the framework for governing their relations) are required. The author then explains the basic financial building blocks of LNG financing. Although the author discusses the banking case model, no numerical example is given. Such an example would have made the chapter more interesting to readers.

Chapter 8 (by Paula Hodges of Herbert Smith) considers the potential areas of disputes in the LNG business and their resolution through arbitration and expert determination. As the LNG industry traditionally relied on complicated long‐term contractual mechanisms, and because it is impossible to predict all future issues at the time of drafting the contract, the risk of disputes is inherent in any such contract. These disputes can involve highly technical aspects, legal issues or both. Often price review mechanisms and Force Majeure clauses are the main sources of disputes. Parties involved in such disputes being multinational in nature rarely employ any local country litigation procedures to resolve the disputes to obtain a fair result for all the parties. Arbitration is the commonly used route while expert determination is followed in more technically oriented disputes. The chapter provides an overview of these two routes available for dispute resolution.

Chapter 9 (by Hywel Jones and Garry Pegg of Hogan & Hartson) is the longest chapter of the book that is devoted to LNG regulation. The chapter essentially focuses on regulations relating to the safety and security of LNG in transit and provides a review of international conventions and codes that are applicable in this respect. It also reviews the UK and US regulations relating to health and safety of LNG transport involving these countries. In addition, the chapter also reviews the regulations employed in the UK and in the USA for planning and approval of new import facilities and for promoting new development. Unlike other chapters of the book which are clearly focussed and provide clear messages, this chapter lacks some coherence. Although the term regulation is used for different purposes, the prime focus on health and safety in transit needed some justification. Similarly, the rationale for choosing UK and US regulations in this respect for LNG imports was not explained. The health, safety and environmental issues related to LNG liquefaction and vessel manufacturing are also left out without any justification.

The last chapter (Chapter 10 by James R. Ball and David Drury of Gas Strategies) is clearly the shortest and considers the geopolitical factors influencing the LNG business. The presentation style of this chapter is quite different from the rest of the book. It is best known to the authors (and the editor) why they did not think it appropriate to divide the content into appropriate sections. The six‐page chapter does not have any introduction or any sections or any conclusion. It appears in the book as an appendage and anything that was not covered was placed here. Given the importance of geopolitical issues in the gas business in general, this chapter merited a better treatment.

From the above review of chapters it is evident that the book thoughtfully covers the entire gamut of topics related to the LNG business. In fact, its comprehensive coverage makes the book highly relevant and gives it the status of a handbook. I would have liked to see a chapter on the economics of LNG covering its comparison with piped gas, LNG pricing mechanisms, de‐linking of LNG prices from oil, and the future prospects. I would have also appreciated a short introductory chapter providing a panoramic view of the gas market development to set the context for LNG. A concluding chapter on the future outlook of the industry and the way forward would also have been highly appropriate. Given the significant growth in the business in recent times, project management and supply chain management issues could have been considered as well. Despite these omissions, the book would prove to be an asset to the readers and would surely be an asset for any organisation working on current energy issues.