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An IENE Study M55,Gina Cohen,Lecturer Consultant on Natural Gas. Published by the,Institute of Energy for SE Europe IENE. 3 Alexandrou Soutsou 106 71 Athens Greece,Tel 30 210 3628457 3640278 Fax 30 210 3646144. web www iene eu e mail admin iene gr,Copyright 2019 Institute of Energy for SE Europe. All rights reserved No part of this study may be reproduced or transmitted in any form or by any means without the prior. written permission of the Institute of Energy for South East Europe Please note that this publication is subject to specific. restrictions that limit its use and distribution,ACKNOWLEDGMENT.
I would like to start by thanking my mentor John Astrop John has been there for. me since I started to work in the natural gas industry He has taught me with. patience and intelligence for the last two decades I have learnt from his endless. knowledge on how to negotiate and craft gas sales and purchasing contracts from. personal experience witnessing him in the act seeing him strategize to achieve. the best outcome for his clients whilst he was constantly exalting the need for. clarity fairness and win win situations for all parties involved where possible. Gina Cohen,DISCLAIMER, The author has made every effort to ensure that the accuracy of the information within this paper was correct at the time. of publication The author does not assume any responsibility and hereby disclaims any liability to any party for any disrup. tion caused by errors or omissions whether such errors or omissions result from accident negligence or any other cause. The information contained within this paper is strictly descriptive and is intended for educational purposes only If you wish. to apply ideas contained in this paper you are taking full responsibility for your actions. ACKNOWLEDGMENT 2,DISCLAIMER 2,Contents 3,LIST OF ABBREVIATIONS 5. 1 INTRODUCTION 6,2 GAS MARKETS BACKGROUND 7,3 GSPA FUNDAMENTALS 9. 3 1 Definitions and functions 9,3 2 Purpose of long term gas contracting 10. 3 3 Duration of GSPAs 11,3 4 Emergence of long term gas contracting 12.
4 CONTRACT TERMS AND DEFINITIONS 15,4 1 General 15. 4 2 Credit rating guarantees 15,4 3 Warranties 16,4 4 Volumetric aspects 19. Contract quantities 19,Take or Pay 27,Make Up Gas MUG 32. Carry Forward Gas 41,Maximum Excess Volumes 43, Downward Quantity Tolerance Upward Quantity Tolerance 45. Shortfall Gas 48,Seller s Commercial Default 52,4 5 Gas nomination procedures delivery program 53.
4 6 Assignment 61,4 7 Liability 62,4 8 Conditions Precedent 63. 4 9 Force Majeure 65,4 10 Political Risk 72,4 11 GSPA termination clauses 75. P a g e 3 136,4 12 Tax stabilization clauses 85,4 13 Destination clauses 85. 4 14 Most Favoured Nation clause MFN 87,4 15 Additional points of negotiations 94. 5 LNG CONTRACTING 96,6 GAS PRICING 102,6 1 Introduction 102.
6 2 Price Negotiations in a GSPA 106,6 3 Elements of gas pricing 107. 6 4 Gas price indexation 108,Oil indexation 111,Alternatives to oil price indexation 116. US LNG exports pricing formula 116,Inflation linkage 118. Gas on gas competition 119,6 5 Floors ceilings and price stability 121. 6 6 Price re openers Price reviews 122,6 7 Gas hub and hub pricing 125.
What is a hub 125,Secondary gas market 125,6 8 Future of gas pricing 130. 7 CONTRACT EVOLUTION 131,8 SUMMARY 133,9 CONCLUSION 134. P a g e 4 136,LIST OF ABBREVIATIONS, 2PMFN Two Party Most Favoured Nation MAQ Maximum Annual Quantity. 3PMFN Three Party Most Favoured Nation MCC Meeting Competition Clauses. ACQ Annual Contract Quantity MDQ Maximum Daily Quantity. ADP Annual Delivery Program MFN Most Favoured Nation. Bcf Billion Cubic Feet MHQ Maximum Hourly Quantity. Bcm Billion Cubic Meters Mmcfd Million Cubic Feet per Day. CAPEX Capital Expenditures Mmscf Million Standard Cubic Feet. CP Conditions Precedent MMBtus Million British Thermal Units. CPI Consumer Price Index MUG Make Up Gas,DC Delivery Capacity NBP National Balancing Point. DCQ Daily Contract Quantity NGA Natural Gas Authority. DES Delivered ex Ship NPV Net Present Value, DQT Downward Quantity Tolerance OPEX Operational Expenditures.
FID Final Investment Decision P P Proven and Probable. FM Force Majeure PPA Power Purchase Agreement,FOB Free on Board PUA Public Utility Authority. GSPA Gas Sales and Purchasin Agreements ROFR Right of First Refusal. HCQ Hourly Contract Quantity ROI Return on Investment. IEC Israel Electric Corporation TCQ Total Contract Quantity. INGL Israel Natural Gas Lines TOP Take or Pay, IOC Independent Oil Company International Tpy Tons per year. Oil Company, IPPs Independent Power Producers TTF Title Transfer Facility. JCC Japan Crude Cocktail UQT Upward Quantity Tolerance. LNG Liquefied Natural Gas,P a g e 5 136,1 INTRODUCTION. The last several years have been marked by considerable discourse between the. natural gas market participants regulators and other stakeholders about the legal. frameworks of international and local gas trade While there have been a number. of papers on the subject including on the differences between spot short term or. long term contracting as well as on gas pricing I will try to focus more in this paper. on the main characteristics of long term gas contracts A lot will be based on my. personal experience and so the paper will neither be all encompassing nor a. purely academic theory purporting to describe a perfect world but rather based on. the understanding that on many aspects there are few general rules and that a lot. is down to negotiations, This paper deals with the Gas Sales and Purchasing Agreements GSPAs1 which.
serve as a tool for the division of market risks by means of tying natural gas Sellers. and Buyers for a considerable period Because of the highly capital intensiveness. and market orientation of gas development Gas Sales Agreements have been one. of the fundamental tools enabling Sellers to invest in exploration production and. development of gas fields transporters to promote essential gas transportation. infrastructure whether pipelines or liquefaction facilities and Buyers to invest in. consumer facilities secure in the knowledge that they will have the gas supplies. needed for their project s life span, Although the market is now moving towards shorter term contracts extensive. reliance on short term and spot transactions in greenfield markets would not have. enabled the parties to obtain the financing needed to develop their market Even. today the international LNG market still has a dominance of long term contracting. although here too short term and spot contracting is experiencing growth Thus. in 2000 only 5 of the world s LNG was sold on a spot basis or on short term. contracts by 2017 that was up to 27 IGU IHS, The aim of this paper is to empirically analyse and draft an overview on gas sales. and purchasing contracts The intention is not to consider all the gas contracting. issues rather only the GSPA fundamentals such as the main terms and. definitions issues of firm volume and flexibility and some of the gas pricing issues. The text is supplied with actual examples and case studies and various aspects of. GSPA practical application including disputes case questions and studies The. research provides both factual data and practical recommendations for both. parties of the contract,1 Or Gas Sales Agreements GSAs. P a g e 6 136, Certain related references are made to gas contracts in Israel as this is where the. author is based and the topic is interesting due to the recent significant discoveries. of natural gas offshore Israel as well as in other countries in the Eastern. Mediterranean Israel is currently facing challenges of expanding its gas delivery. infrastructure to adequately accommodate growing domestic natural gas demand. and potential regional and international exports to Europe These challenges are. frequent in greenfield gas markets and are just as relevant to the other countries. in the Eastern Med characterized by undeveloped gas market regulations and. legislation systems and where long term contracting may be a requisite for. achieving the objectives and thus can be adapted as an ideal learning tool Europe. is keeping a keen eye on all these developments as the potential market for. absorbing some of the surplus gas that will hopefully be exported from Israel. Palestine Cyprus and Egypt, The paper is intended to be a practical tool for both students and individuals.
involved in GSPA negotiations and drafting,2 GAS MARKETS BACKGROUND. Gas markets in various regions regularly undergo changes which can be divided. in the following stages of evolution greenfield brownfield and mature. In the beginning when they are greenfield markets with only 1 2 producing gas. fields limited infrastructure and half a dozen Buyers they develop mostly as. monopoly markets and require long term contracts to be signed between the gas. Seller and Buyer with the price usually indexed to the price of oil As the markets. mature towards brownfield markets with the emergence of competition and the. breaking up of monopolies and or have evolved into such because of changes of. circumstances e g import regasification terminals in the US which are converted. to export liquefaction facilities term contracts are still required but there is the start. of gas on gas competition, In more mature markets with dozens of fields and hundreds of Buyers with a fully. competitive gas and electricity market and unlimited infrastructure with 3rd party. access with increasing market deregulation both Buyers and Sellers have a much. higher degree of certainty that they can sell and buy gas into a spot or hub market. In mature markets spot gas and electricity are traded on anything from an hourly. basis to daily weekly monthly and annual basis At this stage the developers of. gas fields no longer see the need to have long term dedicated gas contracts. because they are confident that they can sell all their output for whatever period. P a g e 7 136, they want at the prevailing spot price There may still be long term GSPAs in. place but the price is simply linked to daily monthly spot prices in the market. Depending on the terms in the contract it may be at a premium or a discount to the. spot price for the period in question, This is a process which historically takes decades to evolve Even today over 65. of gas flowing into Europe is done under long term contracts even if the price. mechanism has changed considerably In Israel the market is still characterized. as a greenfield market with only one producing gas field Tamar and some spot. LNG imports and one prominent gas Buyer Israel Electric Corporation. responsible for 90 of the consumption in the market when the field was. developed IEC s share is falling with each year since 2013 as the electricity. monopoly supplier is being broken up, Because natural gas is in a gaseous state rather than a liquid state as is oil it is.
harder to transport and store This has a number of implications The first is that. about 70 of gas in the world is traded locally compared to 70 of oil traded. internationally leading to local supply and demand fundamentals and pricing. rather than global Total gas consumption in 2017 was 3 680 bcm out of which. 1 134 bcm was internationally traded 740 7 bcm by pipeline and 393 4 bcm by. LNG so that only 10 7 of gas consumed worldwide is traded as LNG2. The second implication of the gaseous state of natural gas contrary to oil in most. cases is that it requires complex and expensive upfront infrastructure investment. to be made to transport it pipelines LNG facilities and to consume it e g power. stations The investment across the chain amounts to billions of dollars and so. Sellers and Buyers alike and the financing institutions at both ends need to know. with a high degree of certainty that the gas will be available for many years 15. 20 years and that the terms price volume of the sale purchase are generally. known in advance by all parties This is especially so in new and immature. markets and if the players need a high degree of financing. On many occasions a gas field is developed specifically for a power project s. dedicated to a certain market and unless the market is a very liquid one such as. mainly exists in Western Europe and North America gas fields are in fact usually. not developed unless an anchor Buyer has purchased sufficient volumes of gas. for the long term at a high enough price to justify the cost of developing the field. As a gas consumer the power station is just as dependent on the certainty that it. 2BP Statistical Review of World Energy 2018, https www bp com content dam bp en corporate pdf energy economics statistical review. 2018 bp statistical review of world energy 2018 full report pdf. P a g e 8 136, will have gas to generate electricity to sell to the clients with whom it has signed. long term power purchase agreements PPAs if it is an independent power. producer or to the market in general if it is a utility essential service provider. What is happening though currently with such huge uncertainties regarding oil and. gas pricing is that Buyers are remaining on the fence and are more reluctant to. sign new long term contracts especially whilst spot or hub prices are often cheaper. than contract prices and whilst portfolio players are developing which in turn. P a g e 5 136 LIST OF ABBREVIATIONS 2PMFN Two Party Most Favoured Nation MAQ Maximum Annual Quantity 3PMFN Three Party Most Favoured Nation MCC Meeting Competition Clauses ACQ Annual Contract Quantity MDQ Maximum Daily Quantity ADP Annual Delivery Program MFN Most Favoured Nation

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