Using common energy distribution and conversion technologies, the lifecycle emissions from LNG are about 50% to 60% of conventional fossil fuels based on export from Australia to customers in Japan. In an era of climate change concerns, this should mean a preference for LNG as an energy source on a global basis.
Interestingly, the recent Australian government announcement, following its ratification of the Kyoto protocol, of a proposed emissions trading scheme has drawn howls of protest from many oil and gas companies (bearing in mind that at least A$60 billion is proposed to be invested in Australian LNG projects!). In brief, the complaint is that the scheme fails to recognise that LNG usually replaces more greenhouse-intensive fuels in its export destinations. It remains to be seen how this tension will be resolved.
Bibliography
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Argus Global LNG Monthly, Volume IV, Issue 8, August 2008.
Atkins, B, “Coal Bed Methane – From Resource to Reserves”, Focus (Gaffney, Cline &
Associates), Issue No 34, October 2003.
BP, Statistical Review of World Energy, June 2008.
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Griffin, P (Consulting Editor), Liquefied Natural Gas: The Law and Business of LNG, Globe Law and Business, 2006.
Haines, L (editor), “Opportunities in Coalbed Methane”, Oil and Gas Investor, December 2002.
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topic449/Total_2004_en_LNG.pdf).
1. Introduction
A gas sales agreement (GSA) is an agreement pursuant to which a party (the seller) agrees to sell and deliver natural gas (gas) to another party (the buyer) at a designated delivery point.
In linking the upstream production or supply of gas with the downstream consumption or onwards supply of gas, the GSA will often be the most important agreement in a gas commercialisation project and will be central to the project’s economics and overall success. Most of the other project agreements will usually be developed around the terms of the GSA.
There are different types of GSAs, and some of the key distinguishing characteristics are as follows:
• Means of bringing gas to market: the means by which gas is transported and brought to market will have a significant bearing on the nature and terms of the gas sales arrangements. In broad terms, commercial quantities of gas can be bought and sold in the form of:
pipeline gas;
liquefied natural gas;1 liquefied petroleum gas; or compressed natural gas.
As pipeline gas constitutes the majority of traded gas, the focus of this chapter will be upon GSAs in the context of pipeline gas rather than liquefied natural gas, liquefied petroleum gas and/or compressed natural gas sale and purchase arrangements (although some of the issues discussed below will be equally applicable in the context of liquefied natural gas, liquefied petroleum gas and compressed natural gas sale and purchase arrangements).
• Responsibility for pipeline transportation: whether the buyer is responsible for the pipeline transportation of the gas from its point of upstream production or supply to the buyer’s gas-receiving facilities (sometimes referred to as an
‘FOB’ deal), or the seller is responsible for such transportation (sometimes referred to as a ‘CIF/delivered’ deal) – which in a greenfield gas commercialisation project will involve the construction of the pipeline and associated infrastructure – is likely to have a impact on the approach of the
agreements
Daniel O’Neill Ashurst LLP
1 Refer to the previous chapter for a detailed discussion of liquefied natural gas.
seller and the buyer to risk allocation under the GSA.2
• Depletion and term-supply contracts: GSAs are often categorised as depletion contracts or term-supply contracts. Under a depletion contract, the seller dedicates all gas capable of being economically produced from a particular field or fields for supply to the buyer. The duration of the contract and the quantities of gas supplied under it will be dependent upon the production profile of the dedicated field(s).3 Under a term-supply contract, the seller commits to delivering agreed contractual quantities of gas for a specified period of time, often without reference to the source of the gas. Some ‘hybrid’
GSAs exhibit characteristics of both depletion contracts and term-supply contracts.4 Depletion contracts tend to be more common in new or developing gas markets. As a gas market matures and liberalises, the concerns of sellers and buyers shift from market risk and security of supply to ensuring flexibility and diversification in gas supplies and markets, and this is usually accompanied by a shift from depletion contracts towards term-supply contracts. As term-supply contracts are more common, the focus of this chapter will be on term-supply GSAs.
• Long-term, short-term and spot arrangements: because of the significant upfront capital costs associated with gas commercialisation projects, gas producers and their lenders have historically insisted upon long-term offtake commitments supported by robust take-or-pay obligations to ensure that gas producers/sellers receive a minimum guaranteed cash flow to underpin their capital investment and/or debt service obligations. Accordingly, the majority of GSAs have tended to be long-term, bespoke contracts with a duration often exceeding 20 years. As a gas market matures and liberalises, this will usually be accompanied by a proliferation of gas infrastructure and capacity availability, with the consequence being that the duration of GSAs tends to become shorter (with the final evolution being spot trading on standardised terms) as sellers and buyers seek to preserve gas marketing and supply flexibility. However, the majority of gas continues to be traded under bespoke, long-term arrangements and therefore the focus of this chapter will be on long-term GSAs.
2. Parties
Given the long-term nature of gas commercialisation projects, both the seller and buyer will be concerned as to the identity of its counterparty and its ability to
2 The terms ‘FOB’, being the acronym for ‘free-on-board’, and ‘CIF/delivered’ (with ‘CIF’ being the acronym for ‘cost-insurance-freight’) are shipping terms which have been adopted by the petroleum industry to connote the allocation of risk and responsibility for pipeline transportation between the seller and buyer of pipeline gas.
3 Depletion contracts will also usually afford the seller with force majeure relief for reserves shortfall or reservoir failure and a right to terminate the agreement when it is no longer economic for the seller to continue to produce gas.
4 An example of a hybrid GSA would be a term-supply contract which also imposes certain reserve commitments and obligations on the seller, such as an obligation on the seller periodically to provide to the buyer reserve certificates demonstrating that the proven, or proven and probable, reserves within a designated source are sufficient to meet the seller’s total remaining gas supply obligations under the GSA, together with restrictions on the seller’s ability to dispose of gas from that designated source to third parties without the buyer’s prior approval.
perform its obligations for the duration of the GSA.5Further, because the identity of the counterparty will have been an important factor in a party’s decision to embark on the gas commercialisation project, that party will wish to limit its counterparty‘s ability to exit the project through the inclusion of stringent transfer restrictions.