legal structures and commercial issues for lng export projects -- north america & beyond
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© 2013
Legal Structures and Commercial Issues for LNG Export Projects --
North America & Beyond
Steven R. Miles
Baker Botts L.L.P.
January 15, 2013
New York, NY
2
Presenter Introduction Recent LNG Deals:
▪ Developing greenfield LNG liquefaction projects:▪ Sabine Pass LNG Wheatstone LNG Yamal LNG▪ Peru LNG Darwin LNG Qatargas 3▪ Tangguh LNG Equatorial Guinea Angola LNG▪ Brass LNG Sakhalin II Pacific Rubiales
▪ Developing the first U.S. LNG export project in 40 years▪ Securing the first LNG supply into new terminals in Brazil,
Chile, China, Dominican Republic, E.U., India, Indonesia, Mexico, Puerto Pico, & U.S.
▪ Negotiating some $500 Billion in LNG sales agreements▪ Chartering 73 LNG vessels (~20% of world fleet)▪ Co-Chair of industry-wide effort for the recently completed
uniform LNG Master Sales Contract
3
Presenter Introduction
4
Focus and Overview of Key Topics
1. Common Project Structures in an LNG Export Project Integrated Upstream Model Merchant Model Tolling Model
2. Commercial Issues Associated with N.American LNG Projects3. LNG Regulatory Regime
FERC authorization DOE Export authorization Policy Issues
4. Final Remarks
5
Common Project Structures – LNG Export Projects
6
Common Project Structures – LNG Export Projects
Three primary project structures for LNG liquefaction projects:• Integrated Upstream Model: Participants own gas supply and
LNG plant, and market own LNG• Merchant Model: Project company that owns the liquefaction
facility purchases natural gas from 3d party and sells LNG to offtakers
• Tolling Model: LNG plant does not take title to natural gas feedstock or LNG produced at the plant, but provides liquefaction and processing services
7
Common Project Structures – Integrated Upstream Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and
Loading Port
LNG Offtake
Physical Assets Ownership
Gas Producers
LNG Buyers
Leases/ Licenses
Gas
LNG
Joint Operating
Agreement(s)
LNG Sale and Purchase
Agreement(s)
EPC Contracts
Joint Marketing Agreement
8
Common Project Structures – Integrated Upstream Model
Benefits: Alignment of interest throughout value chain May have tax and accounting benefits (may be able to use
early losses from LNG plant construction to offset revenues from natural gas or liquids production)
Promotes financeability by reducing cross-default risk Each gas supplier may control its own marketing
Risks: Requires identical ownership of upstream and downstream
assets (structuring with TrainCos can allow future trains with separate ownership)
Key Contracts: JOAs, PAA, LBA Example: Alaska Gasline
9
Common Project Structures – Merchant Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and
Loading Port
LNG Offtake
Gas Producers
LNG Buyers
EPC Contract
Gas
LNG
LNG Sale and Purchase
Agreement(s)
Project Company
Gas Sales Agreement(s)
Physical Assets Ownership Contracts
Lease/License/JOA
10
Common Project Structures – Merchant Model
Benefits:• Allows Project Co. to generate potentially higher returns
based on value of LNG/gas price spread• Allows Project Co. sponsors greater control in sourcing gas
and marketing LNG Risks:
• Project Co. assumes market and counterparty default risks both upstream and downstream
• Requires Project Co. to obtain finance for plant construction based on LNG sales and project revenues
Key Contracts: SPA, GSA Examples: Sabine Pass, Golden Pass, several BC projects
11
Common Project Structures – Tolling Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and
Loading Port
LNG Offtake
Physical Assets Ownership Contracts
Gas Producers
LNG Buyers
Leases/ Licenses
Gas
LNG
Joint Operating Agreement(s)
LNG Sale and Purchase
Agreement(s)
Tolling Company EPC Contracts
Liquefaction Tolling
Agreement(s)
12
Common Project Structures – Tolling Model
Benefits: Avoid commodity price and marketing risks Allows flexibility in ownership -- does not require that all
upstream parties be owners of LNG plant Reduced risk can help project financing of LNG plant, if the
tolling customers have sufficient creditworthiness Risks:
Sponsors do not profit from LNG sales If the gas supplier (toller) is an affiliate of sponsor, security
and cross-default issues can affect financing Key Contracts: TSA, LBA Examples: Jordan Cove, Cameron, Freeport, Cove Point,
Lake Charles, Gulf Coast, Gulf LNG, Elba Island
13
Commercial Issues Associated with N. American LNG Projects
14
Commercial Issues Associated with N.American LNG Projects
Development Funding -- At risk Consideration?
Equity Tolling discount
Construction cost risk -- TSA signed before FID Who takes risk of cost escalation during development?
During construction? Is there risk sharing? Exit ramp? Greater issue for greenfields than for expansions
Gas Supply Tollers must obtain gas (SPA buyers need not) Buy off grid, or dedicated source? (EPA issues?)
15
Commercial Issues Associated with N.American LNG Projects (con't)
Terminal Force Majeure risk Customer continues to pay toll/fixed charge? How long? Termination right?
Change in law or tax risk TSA customers may bear this risk; SPA buyers rarely do
Multi-users Inter-customer default/credit risk? Are partial assignments permitted?
Pipeline Who owns the pipeline, is there capacity available, and will
an open season by required?
16
Commercial Issues Associated with N.American LNG Projects
Considerations upon Reconfiguring an LNG import Project as a Bi-Directional Facility Need to navigate around existing regas customers -- literally
and figuratively Gas nominations, storage, and scheduling are more
complex, less flexible Effects on the associated pipeline to accommodate both
imports and exports
17
LNG Regulatory Regime
18
Regulatory Regime
Regulatory Regime Overview Satisfying regulatory requirements may require significant
investment of time and resources. In the United States, Section 3 of the Natural Gas Act
("NGA") governs construction of export facilities and export of LNG. Primary regulatory authority under NGA:
FERC: LNG facility siting authority. Department of Energy ("DOE"): Approval for exports
of the commodity. Pipelines governed by Section 7 of the NGA.
FERC: Regulation of pipelines.
19
Regulatory Regime
DOE Export Authorization DOE required to authorize the export unless it finds the
proposed exportation "will not be consistent with the public interest."
Exports to a country that has entered into a Free Trade Agreement ("FTA") with the United States deemed to be within the public interest.
Presently, only one license granted by DOE for LNG export to non-FTA countries. Granted to Cheniere Energy. 16+ applications pending
20
Regulatory Regime
Policy Issues Dec. 5, 2012, DOE releases NERA study on LNG exports:
“Across all ... scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.”
Comments due Jan. 25; reply comments Feb. 24 DOE to consider first those applications for which FERC has
given approval to commence pre-filing for FERC license EPA & Sierra Club urge DOE review of upstream impacts
Both FERC and the 2d Circuit Court of Appeals have rejected similar arguments
21
Final Remarks
22
Final Remarks
Sponsors should carefully consider their risk/reward posture, and that of their investors and lenders
Select the appropriate structure; changes later can increase costs, impede marketing, and cause delays in financing
Focus on obtaining creditworthy customers -- both capital and regulatory approvals are likely to follow strong financials
Align contract terms to reflect structure, comply with licenses, and promote project commercial and financial success
23
Final Remarks
Presented By:
Steven R. Miles
Head of LNG Practice
Baker Botts L.L.P.
1299 Pennsylvania Ave., NW
Washington, D.C. 20004-2400
+1 202.639.7951
steven.miles@bakerbotts.com
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