For the Long Haul: The Suitability of the Base Contract for the Sale and Purchase of Natural Gas for Long-Term Transactions

Summary

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On Apr 23, 2002, the North American Energy Standards Board (NAESB) issued a press release announcing the debut of the Base Contract for the Sale and Purchase of Natural Gas (NAESB Contract). The NAESB Contract is a revised and expanded version of the Base Contract for the Short-Term Sale and Purchase of Natural Gas which had been adopted by the Gas Industry Standards Board, the predecessor of the NAESB, and had gained widespread acceptance by the natural gas industry. Although, according to NAESB, the NAESB Contract has been designed to be utilized in both long-term and short-term natural gas transactions, its genesis as a short-term trading contract remains evident in the large number of the provisions it contains that have a short-term orientation. It is nevertheless true that the NAESB Contract has been crafted with options and flexibility such that the parties may transform it into an agreement suitable for the long-term.

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Extract

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For the Long Haul: The Suitability of the Base Contract for the Sale and Purchase of Natural Gas for Long-Term Transactions

I. BACKGROUND[dagger]

A. History

On April 23, 2002, the North American Energy Standards Board (NAESB) issued a press release announcing the debut of the Base Contract for the Sale and Purchase of Natural Gas (NAESB Contract).1 The NAESB hailed the NAESB Contract as "[the] answer to the gas industry's call for a contract that can be used for a wide variety of transactions, both long and short-term . . . ."2

Generally speaking, the NAESB Contract is a revised and expanded version of the Base Contract for the Short-Term Sale and Purchase of Natural Gas (GISB Contract)3 which had been adopted by the Gas Industry Standards Board (GISB), the predecessor of the NAESB, and had gained widespread acceptance by the natural gas industry.4 According to a disclaimer found in bold text on the first page of the GISB Contract, the GISB Contract "is intended for Interruptible transactions or Firm transactions of one month or less and may not be suitable for Firm transactions of longer than one month."5 The explanatory notes for the GISB Contract stress the intended short-term nature of the GISB Contract by stating that (i) the creation of the GISB Contract was at the request of natural gas traders to facilitate both traditional and electronic trading, and (ii) the GISB drafting committee, in preparing the GISB Contract, focused its efforts on the spot contract in order to keep the new model as simple as possible.6

Almost four and a half years after it's unveiling, the NAESB Contract has lived up to its promise of being an instrument that is widely used to document both long and short-term purchases and sales of natural gas. But the question remains-is it really appropriate for long-term transactions, given its origins in the GISB's short-term spot contract? The short answer to that question, subject to an important caveat, is YES. The important caveat is that in order to be suitable for long-term transactions, certain elections in the NAESB Contract must be made and certain special provisions must be added to the NAESB Contract in a "Special Provisions" addendum. The purpose of this Article is to provide guidance on the elections and types of special provisions that should be selected and/or added, or at least considered, when using the NAESB Contract for a long-term natural gas supply arrangement.

B. The Four Corners of the NAESB Contract

The NAESB Contract is comprised of four basic parts: (i) the Base Contract for Sale and Purchase of Natural Gas (Base Contract), (ii) the General Terms and Conditions to the Base Contract f...

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