Depending on the circumstances of the particular project, the term of a GSA may comprise a number of distinct periods during which different rights and obligations will apply. By way of example, the term of a GSA may comprise the following periods delineated by particular milestones or occurrences:
Although the term of the GSA will commence upon signing, if the GSA is expressed as being subject to the satisfaction of conditions precedent, then some but not all of the rights and obligations under the GSA will become binding with effect from signing.10
9 Apart from joint liability of multiple sellers being commercially more attractive to a single buyer, practically the multiple seller separate agreement and several liability approach can give rise to complexities and concerns from a buyer’s perspective. Because the gas will be supplied in a common stream, it may be difficult for a buyer to determine which individual seller was liable for a particular default. Further, because the sellers will usually insist on the inclusion of a provision that default by one seller shall not constitute a default by the other sellers, the sellers will usually resist any attempt by the buyer to include a provision to the effect that any seller default under the GSA shall be apportioned pro rata in accordance with the sellers’ respective proportionate shares, as the sellers may regard this as undermining the principle of several liability.
10 Those provisions coming into force upon signing would typically include the definitions and interpretation provisions, the conditions precedent, the dispute resolution provision, confidentiality obligations and other boilerplate provisions.
CP satisfaction period Contruction period Commissioning period Build-up period Plateau period Post plateau period Extension period
Commencment
3.1 Conditions precedent
The inclusion of conditions precedent will enable the parties to commit to the terms of the GSA while deferring the performance of substantive obligations relating to the supply and offtake of gas and capital investment, until such time as certain matters fundamental to the ability of the parties to be able to perform the GSA have been adequately addressed.
While the conditions precedent will need to be tailored to the particular circumstances of the project, conditions precedent commonly seen in GSAs include:
• obtaining all necessary government approvals necessary for the performance of the agreement;
• entry by the applicable parties into, and/or coming into effect of, other key project agreements;11and
• entry into, or first drawdown under, any third-party financing arrangements.
To avoid uncertainty as to the effectiveness of the GSA, it is important that only those conditions precedent which are genuinely necessary for the parties to be able to proceed with the gas commercialisation project be included.
Upon satisfaction (or waiver) of each of the conditions precedent, the GSA will become unconditional and certain rights and obligations of the parties will come into effect. This will usually be the time when the parties will be obliged to make their respective capital investments in the gas commercialisation project and commence the construction of the project facilities.
3.2 Start date
The parties will generally be obliged to have completed the construction of their respective facilities and be ready to supply or receive gas on or before a particular date (the start date). The start date will, therefore, usually be the date on which the seller is first obliged to deliver gas to the buyer in accordance with the buyer’s proper nominations, and it will also be the date on and from which the seller will be liable for shortfall for a failure to deliver a properly nominated quantity of gas to the buyer, and the buyer will be subject to take-or-pay (discussed below).
Although the parties may agree a fixed start date at the time of entering into the GSA, more commonly they will defer the determination of the start date until a later time during the term, when the construction of the project facilities is well advanced and the parties are in a better position to judge and mutually agree an appropriate state date. This is normally achieved through a ‘window’ start date mechanism, pursuant to which the parties periodically agree on window periods (usually of several weeks or months in duration) within which the start date will occur, with those window periods gradually narrowing as the construction phase progresses and with the parties finally agreeing on a start date falling within the final window period. The window mechanism removes a significant degree of the uncertainty
11 Examples may include (i) gas transportation arrangements where pipeline transportation of the gas will be carried out by an entity other than the seller or buyer, (ii) governmental agreements supporting the project, and (iii) EPC contracts relating to the construction of project infrastructure.
associated with having to predict the start date so far in advance of the completion of the construction of the project facilities, and enables the parties better to coordinate and synchronise their respective project timetables so as to minimise potential liabilities associated with late start-up and unwanted facilities downtime.
3.3 Late start
If a party (the ‘late start party’) is not ready to deliver or receive gas on and from the start date and the delay is not excused under the GSA (eg, pursuant to force majeure), then in the absence of provisions to the contrary a late start seller would be liable for full shortfall gas liabilities, or a late start buyer would be liable for full take-or-pay liabilities, on and from the start date.
As the imposition of full liabilities on the seller or buyer on and from the start date may be considered unduly onerous at such a formative stage of the gas commercialisation project, the parties may provide for reduced shortfall gas and take-or-pay liabilities to apply for an initial period following the start date to lessen the severity of the application of those liability regimes.12
3.4 Commissioning and performance testing
As the commissioning of a party’s facilities will usually require the cooperation of its counterparty either to deliver or take gas, the GSA will generally prescribe a mechanism pursuant to which the parties are to agree procedures for the coordination and synchronisation of the commissioning of their respective facilities (‘commissioning procedures’).
Commissioning will typically occur over a number of days or weeks immediately prior to the start date (‘commissioning period’). During the commissioning period, the parties will be under a reasonable endeavours obligation to either deliver or take gas, with neither the seller nor the buyer being subject to shortfall gas or take-or-pay liabilities for any failure to deliver or take gas during this period.
The price which the buyer is obliged to pay for commissioning gas may be a contentious issue in the GSA negotiations. Whereas the buyer may argue that a price discount should apply to commissioning gas on the basis that such gas is not supplied on a firm basis and therefore has a reduced economic value to the buyer, the seller may argue that the full contract price should apply to commissioning gas, particularly if the buyer is able to utilise the gas for its intended commercial purpose.
The GSA may also provide for performance tests to be conducted in respect of the parties’ respective facilities prior to the start date in order for each party to satisfy its counterparty that its facilities are capable of fully discharging its gas supply or offtake obligations under the GSA.
3.5 Gas supply period
The gas supply period is the period during which the seller is under a firm obligation
12 For example, a GSA may provide that a late start party has a grace period of 30 days following the start date during which it will not be liable for shortfall gas or take-or-pay (as the case may be), following which 50% of the applicable liabilities shall apply for any further period of late start up to 30 days and thereafter full shortfall gas and take-or-pay liabilities shall apply.
to deliver gas to the buyer in accordance with the buyer’s proper nominations, and the buyer is obliged to take and pay for, or pay for if not taken, a minimum contractual quantity of gas as reflected in the take-or-pay obligation.
Under a term-supply contract, the gas supply period will normally commence on the start date and end on an anniversary of the start date (eg, on the twentieth or twenty-fifth anniversary of the start date).
The gas supply period may itself be divided into several sub-periods, including (i) a ‘build-up’ period, during which the quantities of gas to be supplied will gradually increase as the gas production comes on-stream (ii) a ‘plateau’ period, which will run for the majority of the gas supply period and during which the full contractual quantities obligations will apply, and (iii) a ‘post-plateau’ or ‘tail-off’ period, during which the quantities of gas to be supplied may gradually reduce. While term-supply contracts may not provide for a build-up and/or post-plateau period, depletion contracts will typically provide for a build-up period, plateau period and post-plateau period to reflect the changing production profile of the dedicated field(s) over the term of the GSA.
3.6 Term extensions
The GSA may provide for the gas supply period to be automatically extended in certain circumstances, including where outstanding make-up gas or shortfall gas quantities exist at the expiry of the gas supply period, or to enable the delivery of quantities of gas not able to be delivered during the initial gas supply period due to force majeure. Other than in these circumstances, the right to extend the gas supply period will generally be subject to the mutual agreement of the parties.