CONTRACTUAL ISSUES IN MOVING NATURAL GAS ACROSS BORDERS IN THE SOUTHERN CONE
| Jurisdiction | Derecho Internacional |
(2001)
CONTRACTUAL ISSUES IN MOVING NATURAL GAS ACROSS BORDERS IN THE SOUTHERN CONE
Bazán, Cambré & Orts
Buenos Aires, Argentina
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INTRODUCTION
As taught by Messineo,1 the juristic concept of the contract presupposes an economic motivation and depends on the same. The contract is the typical instrument for economic collaboration among individuals, but it cannot escape dominant political criteria, as well as the economic phenomena of the market in which it is conceived and materialized. The contract is, in the words of Mosset Iturraspe and Lorenzetti,2 an economic instrument that aids the parties' development in the market, and it is precisely within market dynamics where the contract acquires its outline and structure.
The influence of the economic and legal context, added, in the case of the Southern Cone, to the infrastructure existing throughout a vast territory, are reflected to a remarkable extent in the drafting of the gas export contracts which we outline in this paper.
On the basis of this premise, we observe that transborder natural gas sales contracts pose certain peculiarities which, generally, are caused by the following:
1. Regulations in force and market conditions in both the exporting and importing country.
2. Prevailing tax situations on both sides of the border.
3. The economic scenario of the target market.
4. Financing needs related to the existing transportation infrastructure required by the exportation, especially in the case of a single-export pipeline.
Most of the reasons mentioned above, which are dynamic and subject to constant change, are set out in specific clauses, while others evidence their impact on a number of provisions.
It is the purpose of this paper to present an overview and a brief discussion of these specific clauses and provisions as typically inserted in natural gas transborder sales contracts in the Southern Cone, with special emphasis on those involving an Argentine party.
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1. Impact of Regulatory Frameworks and Market Conditions
Under certain circumstances, the regulations enacted by the natural gas countries of origin may curtail the freedom to fix prices, and/or the manner in which prices may be adjusted or redetermined in time.
This restriction to freedom of commerce is usually based on the concept of protection of the consumer of the exporting country against maneuvers that may distort — sometimes severely — market structure, through the loss of competitive advantages, for instance, in certain industries of the gas exporting country. In very rigid cases, said regulations usually prevail even in the presence of clearly incremental exports with regard to the domestic demand and even when there is no local demand interested in contracting upon terms and conditions similar to those agreed upon for exportation. In other cases, curiously enough, the "scarce resource" condition prevails in the mind of the country of origin's regulating entity, while said view should be exclusively reserved to the importing one.
Re-entry and domestic re-sale prohibitions are intended to adequately cover these situations. Gas export contracts will typically contain language prohibiting the purchaser from re-exporting the gas purchased to the country of origin, in any of form of energy, unless expressly authorized in writing by the seller. Default of this provision will entitle the seller to contract termination upon sole notice to the purchaser.
Another usual restriction imposed on the purchaser refers to the prohibition to dispose of the natural gas purchased in a manner different from that set forth under the contract. Domestic re-sale or unauthorized disposal are subject to stringent contract penalties.3
When exports require that natural gas be moved through the transportation system regulated in the country of origin, the structuring of the sale price at the border must adopt complex mechanisms which may include price or fee adjustment equations through indicators unrelated to market needs.
Regulatory requirements of the country of origin usually require the opening of different components of the price at the border, which can lead to an inefficient allocation of risks.
Regulations in force in the importing country impact the degree of market openness, and greater or lesser possibilities of direct contact between supply and demand. In fact, a direct sale to an industry does not have the same economic requirements as one made through a gas distribution company.
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Technical specifications to be fulfilled by the resource marketed on both sides of the border is also a matter of concern. The existence of asymmetries on this issue may frustrate a proposed transaction.
Finally, when addressing regulatory requirements, conditions precedent inserted in the contract may give rise to significant issues. In addition to the usual wording drafted in commercial contracts for the purchase and sale of assets, transborder gas sales agreements in South America typically include a special provision under which all government authorizations, permits and/or licenses of the exporting country will be considered a condition precedent for closing.4 Simple as it may seem at a first glance, such a procedure may become complex. For example, the Argentine government will not give an "open" export authorization, but will instead approve a specific transaction and contract. Accordingly, the full force and validity of the contract will be subject to the final approval of the enforcing authority, a fact that is carefully regarded by the eventual financiers of the project.
2. The Tax Issue
As a rule, tax issues have a strong impact on exportation projects, and such impact must be allocated between the parties.
A standard tax cost allocation provision will state that the gas price does not include taxes or rates existing at present or imposed in the future by the government on or in relation to the sale or delivery of gas at the point of delivery, and therefore, any tax that may be
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applicable thereto under applicable laws and regulations enacted by the national, provincial and municipal governments must be added to the agreed upon gas price.5
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3. The Economy of the Importing Market
The features of the market to be served, such as demand patterns and types of natural gas alternative fuels, have a major bearing on transactions.
In addition to regulatory pitfalls that have an impact on pricing mentioned in item 1. above, seasonal demand factors, and potential complementarity or redundancy with that existing in the market of origin do not only contribute to the fuel pricing, but also have an impact on transportation costs. For example, a relatively flat market offers incentives for the Argentine producer. A market that tolerates interruptible supply in winter, that is to say, that is complementary to the Argentine market, adds incentives for the exporter. In these situations, the relationship between take-or-pay levels and price may be favorable to the purchaser.
If the market resorts to low-quality alternative fuels, or if such fuels are subsidized, it is very difficult to find a parity value for natural gas that satisfies the needs of all parties involved. Moreover, this situation hinders the development of a price adjustment formula that respects a certain price ratio between gas and its substitutes.
When a commodity-producing industrial market is involved, the seller will normally need to link the gas purchase price to that of the product. This situation conveys volatility to gas price frequently not manageable in long-term transactions. For these situations, the use of stabilizing elements in the price adjustment formulae is used.
In general terms, prices adjustable by complex formulae that include factors such as WTI, PPI, Gas Oil and/or commodity prices, are limited by floors and ceilings.
The floor usually represents the limit of the risk, which the seller is willing to take, and, in turn, the ceiling indicates the maximum value that the purchaser is willing to pay. In long-term agreements, as is the usual case for exports, and in order to ensure constant currency values, ceilings and floors are normally adjusted by the inflation of the payment currency, that is to say, the dollar.
Typically, international gas sales contracts in our region include a "most favored nation" provision, underlying which are equal treatment and price-efficiency principles. In the words of J. Mulherin,6 "these provisions are a competitive response to the...
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