CHAPTER 15 REOPENING PRICE PROVISIONS UNDER LONG-TERM GAS SUPPLY AGREEMENTS
| Jurisdiction | Derecho Internacional |
(Apr 2013)
REOPENING PRICE PROVISIONS UNDER LONG-TERM GAS SUPPLY AGREEMENTS
Partner, Allen Overy
Hong Kong
PAUL GRIFFIN is recognised as one of the world's leading energy lawyers, with over 25 years of experience in the international oil, gas, and LNG sectors. A partner with Allen & Overy based in Hong Kong, he focuses on M&A transactions and large-scale commercial agreements for energy clients. He has broad experience in many jurisdictions including matters of dispute resolution and public international law in relation to the oil and gas business. Mr. Griffin's experience includes advising Yamal LNG on the sale of LNG into European and Asian markets; Reliance Industries on the sale to BP of a 30% stake in 23 PSAs and formation of a joint venture for the sourcing and marketing of gas and development of related infrastructure in India; Israel Electric Corporation on the import of LNG into Israel by means of ship-to-ship transfers and floating re-gasification facilities; Perenco on a borrowing base facility regarding oil and gas interests in Gabon, Colombia, Democratic Republic of Congo and the U.K.; Inpex regarding participation in the Kashagan oil field in Kazakhstan and the implementation of the KCTS tanker and pipeline route for oil from Kazakhstan across the Caspian Sea to Azerbaijan; Total on long-term gas sales arrangements with PTT for gas from the Yadana field offshore Myanmar; Centrica on the purchase of the license interests of Canadian Superior (in CCAA process) offshore Trinidad and Tobago and the exercise of related preemption rights; Israel Electric Corporation on development of the Egypt/Israel gas pipeline and long-term sales of gas from Egypt to Israel, together with related treaty arrangements; Centrica regarding an expedited High Court application for specific performance of a sale and purchase agreement in relation to oil and gas assets in the North Sea; EON Ruhrgas on a joint venture with Union Fenosa, Galp Energia, Sonagas and the Government of Equatorial Guinea for development of gas interests and export of LNG; and Hong Kong and China Gas on participation in the Guangdong Dapeng LNG facilities in China and related arrangements for the off-take of re-gasified LNG. His numerous publications include: LIQUEFIED NATURAL GAS: THE LAW AND BUSINESS OF LNG (Paul Griffin, ed., Globe Business Publishing 2d ed. 2012); Import Contracts and the Cross-Border Transportation of Gas, in ENI ENCYCLOPAEDIA OF HYDROCARBONS; Allocation and Attribution of Natural Gas in Commingled Streams, in MIDSTREAM GAS AGREEMENTS, David/Sweet and Maxwell; and Transnational Gas Agreements, in GAS AGREEMENTS (Martyn R. David ed., Sweet and Maxwell 2001). He is a member of the Oil & Gas committee of the International Bar Association, the International Committee of the Institute of Energy Law, and the Association of International Petroleum Negotiators.
This paper is based on a chapter which appears in the book "Liquefied Natural Gas, The Law and Business of LNG, Second Edition" published by Globe Business Publishing Limited (www.globelawandbusiness.com
© 2012 Globe Business Publishing Limited) and edited by Paul Griffin.
1. Discord and LNG SPAS
The last decade has seen an increasing trend of reference to arbitration or other formal dispute resolution processes in circumstances of commercial imbalance under long-term agreements for the sale and purchase of natural gas by pipeline and particularly as liquefied natural gas (LNG SPAs). The mis-alignment of many LNG SPAs with prevailing markets and the disparity of commercial balance under those LNG SPAs suggest that this trend is unlikely to decline. It certainly appears that few buyers or sellers that have pursued or been forced into these processes have emerged from them with satisfaction, even if the decision has been in their favour. The identities of those appointed to make such decisions, the procedures followed and the nature and effect of those decisions have all been grounds for dissatisfaction. This paper considers these issues in the context of price review provisions under LNG SPAs written subject to English law. It suggests that the typical form of price review provision is often ill suited to its purpose, and that the customary reference to arbitration in the event that the parties do not agree contractual revisions is inappropriate. This paper also considers alternative approaches which may better reflect the intentions and purposes typically underlying the price review provisions of an LNG SPA. These principles will apply to LNG SPAs and long-term pipeline gas sales agreements alike.
The wording used in a price review provision is likely to have been the subject of extended discussion and negotiation by the parties over a long period of time. These provisions can constitute some of the most difficult areas of negotiation and may well be left over to the last sessions, when the mood of the negotiators becomes one where the overall enthusiasm to conclude an agreement militates in favour of drafting which, rather than reflecting agreement on these matters, is sufficiently obscure or ambiguous to enable the parties to put it to one side and sign the overall agreement. When such a provision becomes subject to judicial scrutiny, it is for the judge to interpret that provision. A nice judicial acknowledgement of the difficulty of this task in this context arose when, in reviewing a comfort letter in Chemco Leasing SPA v Rediffusion [1987], 1 FTLR 201, Justice Staughton commented:
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when... business men wish to conclude a bargain but find that on some particular aspect they cannot agree, I believe it is not uncommon for them to adopt language of deliberate equivocation, so that the contract may be signed and their main objective achieved. No doubt they console themselves with the thought that all will go well and that the terms in question will never come into operation or encounter scrutiny; but if all does not go well, it will be for the courts or arbitrators to decide what those terms mean. In such a case it is more than somewhat artificial for a judge to go through the process, prescribed by law, of ascertaining the common intention of the parties from the terms of the document and the surrounding circumstances; a common intention was in reality that the terms should mean what a judge or arbitrator should decide that they mean, subject always to the views of any higher tribunal.
2. Effects on existing long-term contracts
In the context of pricing provisions under LNG SPAs, this paper contemplates how readily long-term common law contract terms can respond flexibly to changing circumstances over time. Can contracts which reflected the parties' intentions at the outset adjust to the changed circumstances, and will the parties' relationship be periodically reset back to the original basis of the agreement or to the changed circumstances of the day? Put another way, will that contractual relationship evolve over time or will the changes be such as to bring the contractual relationship to an end? Expressed in more legal terms, can the changes of circumstances be reflected in changed contractual terms while maintaining sufficient certainty to ensure enforceable rights and obligations in accordance with the original intention of the parties as expressed in the words of their bargain?
The petroleum sector is inevitably an area of political and regulatory concentration, whether locally or on a regional scale. Politicians and regulators are not noted for their recognition of the terms of long-term contracts and the traumas of the 'take-or-pay' wars in the United States in the 1980s and the restructuring of long-term contracts in the United Kingdom in the 1990s bear witness to the effects of regulatory change on long-term gas contracts. More recently, the European Union has taken assertive steps against long-term gas contracts perceived as having an adverse effect on trade between member states. The application of the EU competition rules has resulted in forced changes to long-term gas contract terms concerning destination clauses, joint selling and marketing, and pricing. The delivery of natural gas into European markets has been facilitated over many years by long-term contractual arrangements which have become subject to change by reason of EU initiatives. In many cases these forced changes are seen to reduce the value of the contracts for the (usually) state-owned or state-influenced producers. As the Algerian minister of energy has said: "Those that have an impact on the market, that is the European institutions, should be aware of our issues. When they passed their legislation, they never consulted us. They have never thought of talking to the gas-exporting countries before passing their laws."
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3. LNG pricing
Over time, the LNG sector has seen a number of approaches to setting an appropriate price for LNG deliveries, including fixed pricing, linking to inflation and, more usually, linking to competing fuels in the buyer's market. The buyer's markets have usually been national or, at most, regional and the most usually chosen competing fuel has been crude oil. In most markets beyond the United States, during the early stages of market development, LNG imports have been the subject of long-term purchase agreements made by national or regional monopoly gas buyers with (often distant) producers. Those buyers have tended not to face competition from other gas sellers in their own markets, but have demand-based concerns - particularly in relation to competition from alternative fuels, principally oil products. Those producers have tended to be concerned with supply-based matters and particularly with costs of production over time.
The principles of pricing LNG have developed differently in different markets. For many years the...
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