COURSE ON LNG

BUSINESS
Session-7
Gas/LNG contracts
 Quantity
 Annual gas quantity is generally agreed upon and is
called ACQ
 There may be provisions to build up ACQ in initial period
of Contract
 There may be flexibilities provided for upward and/or
downward revisions in the ACQ while specifying
quantities for a year under the annual programme. This
may be about 10% of the ACQ
 There may be provisions for Adujsted ACQ (AACQ) by
adjusting ACQ for the flexibilities requested by the Buyer
in an annual programme. Such AACQ also reflects
adjustments due to quantities that are requested for
various deficiencies in supply and/or offtake
 Quantity
 Various terms used for adjusted quantities are make
good gas, Restoration quantity, make up gas
 MAKE GOOD GAS can be requested for quantities of
gas not taken by Buyer by exercising the downward
flexibility
 Restoration Quantity is that quantity of gas which Seller
failed to supply due to Force Majure conditions in
previous years. Buyer can request for additional
quantities against this for determining AACQ in an
annual programme
 MAKE UP GAS is the quantity of gas that the Buyer
could not take but paid for under ‘Take or pay’ provisions
in previous years
 Generally these quantities are required to be supplied by
Seller subject to his having flexibility to give such
supplies and such additional quantities in a year are
limited to a certain percent of ACQ as maximum possible
quantity.
 Quantity
 Gas taken by Buyer in a year is adjusted in following
order of priority of heads:
1. ACQ
2. Make up gas
3. Make good gas
4. Restoration quantity
5. Upward flexibility quantity
 There may be provisions to supply such quantities
even after Term of Contract and such period is
generally called Recovery Period
 AACQ=ACQ+MU+MG+RQ+UF-DF
 A ledger of these quantities is maintained by every
year adjusting cumulative quantity under each head
Annual programme and Nomination
 Seller gives Notice of annual quantities available for the
year
 Buyer gives Notice of annual quantities required in the
year
 Such Notices normally give quarterly requirements
 There are provisions for Buyer to revise annual
programme before a certain period especially to change
AACQ by changing various categories of supply he can
ask for
 After annual quantities are agreed there is a detailed
procedure laid out to give quarterly, monthly and daily
requirements by the Buyer. Such requirements are called
Nominated Quantity by the Buyer
Annual programme and Nomination
 There are certain flexibilities provided to change
Nominations within certain limits and such revised
nominations on daily basis are called Properly
Nominated Daily Quantity (PNDCQ)
 Variations with respect to PNDCQ on daily basis is
allowed in a narrow band and is generally required to be
followed
 Aggregate of PNDCQ in a year will not exceed AACQ for
that year
 Generally there is a limit upto which DCQ can be
considered by Seller, in any year, to consider supplies
under various heads considered in Quantity for AACQ
Delivery pressure and temperature
 Min. and Max. pressure at Deliver Point
are specified
 Generally gas supply temperature is near
ambient conditions but in case of need for
pressure reductions at Buyer’s end there
may be need to ensure that gas supply
temperature is not too low whereby gas
after pressure reduction goes below its
Dew point.
 Quality
 Gas is required to be supplied as per agreed
range of composition and calorific value
 If gas is not as per agreed specs. Then it is
called off-spec gas
 Buyer has right to reject off spec gas and non
supply due to such rejection is considered as
Seller’s shortfall in supply
 Buyer and Seller may agree continue off spec
gas sale and at mutually agreed terms
 Seller is obliged to make reasonable endeavors
to restore the gas quality as per specs as soon
as possible
 Measurement procedures
 Seller is generally required to install necessary
instruments and meters to measure the gas
quality and quantity supplied under the Contract
at the Delivery Point
 Such measurements result in calculations of
MMSCM and mmbtu of gas supplied
 The type of instruments to be used and
maximum possible tolerance limits in
measurements is agreed upon. Necessary
redundancies in case of certain instruments and
equipment are also agreed upon
 Measurement Procedures
 Buyer normally has option to install his own
check meters if he so desires
 Generally a joint measurement and/or
certification procedure is laid down in Contract.
Buyer has inspection rights on such facilities.
 Periodic checks and recalibrations are provided
for with detailed procedures for it
 In case of fault detection in measurement
detailed procedures are provided for revising the
quantities supplied under the Contract
 Price
 Pricing formulae are agreed upon
 References for indexation used and their use in pricing
formulae are clearly identified
 Gas supplied is to be paid for as per the gas price
determined by such formulae for each billing period
 Price may be denominated in FE as well as Rupees. In
case of FE procedures for determining applicable
exchange rate are provided for
 Applicable taxes and levies are normally charged extra
at actuals
 Change in Law provisions take care of any change in
taxes and levies from time to time.
 There may be provisions for periodic revisions in pricing
formula
 Billing and payments
 Seller is required to raise invoices at agreed intervals
(may be fortnightly/ monthly)
 Invoice to give full particulars of quantities of gas
supplied under different heads and the price payable for
each
 If any changes in quantities are required then correction
invoices are to be issued
 Miscellaneous invoices are to e raised in case of
amounts payable by the concerned party as per
provisions of Contract e.g. difference in price for make
up gas
 Annual statements are required to reconcile various
quantities of gas supplies due and/or made during the
year including ‘Take or pay’ obligations or LDs for
suppliers shortfall in quantities
 Payment Due Dates are agreed after 5-10 days of
invoice date
 Billing and payment
 Buyer has right to dispute any invoice with supporting documents
and a procedure is defined for notifying and resolving such dispute
 Normally Buyer is expected to pay as per Invoice irrespective if
Disputed amount
 Provisions are normally made for refunding disputed amounts to
Buyer with interest, if on dispute resolution it is determined that
Buyer has been overcharged
 Currency of payment is defined
 Very elaborate payment security mechanisms are agreed upon
wherein Buyer is required to provide irrevocable LC or BG from a
reputed bank in favour of Seller
 LC or BG amounts are agreed based on anticipated value of agreed
number of billing cycles
 In any case detailed credit analysis of Buyer is undertaken by Seller
before entering into a Contract to have comfort about payment
security
 ‘Take or pay’ provisions and LDs
 Normally Buyer is obliged to take the agreed AACQ of
gas in a Contract Year and pay for it
 If for any reasons Buyer fails to take this quantity (or any
agreed percentage of AACQ) in a year he is liable to pay
for that quantity of gas irrespective of fact that he may
have actually taken less quantity of gas
 Such obligations of Buyer are called ‘Take or pay’
obligation
 Quantities not taken due to Force Majure are excluded
from calculating ‘Take or pay’ liabilities
 Seller’s shortfall in supplies shall also be deducted from
the amount of gas required to be taken by Buyer for
determining such liability
 There may be some finer provisions for quantity
calculations like not considering gas off taken in excess
of PNDCQ on any day or make up gas taken etc.
‘Take or pay’ provision and LDs
 If the Seller fails to supply quantity of gas as
per PNDCQ then such shortfall quantities are
called Seller’s shortfall quantities
 No ‘Take or pay’ liability for this quantity
 Seller may have obligations to compensate
Buyer in some agreed manner
 Such compensation by Seller is called
Liquedated Damages (LDs) payable by Seller
 LDs may be for compensating Buyer for
increased cost due to use of alternate fuel or it
may be predetermined as loss of value for
Buyer due to nonavailability of gas
 Dispute resolution mechanism
 Parties would normally be obliged to discuss and resolve
any dispute amongst them by mutual discussions
 In case of failure to resolve dispute by discussions,
Parties would have agreed to a well defined mechanism
and procedure for dispute resolution
 Dispute resolution may be by a sole expert, especially in
case of dispute related to technical aspects, or by an
Arbitration process
 Arbitration may be as per Indian Arbitration and
Conciliation Act,1996, or as per ICC or UNCITRAL Rules
 Venue, manner of appointing arbitrators, cost of
arbitration etc. are clearly agreed and specified
 Award of arbitration is binding on all parties and is not
challengable in any court of Law except for enforcing the
award.
 Force Majure
 Any act of GOD/NATURE CALAMITY,
unforeseen circumstances etc. are called
Force Majure events
 If any Party declares Force Majure it is
relieved of its obligations which are
affected by the event of Force majure and
till the time such event continues
 Types of events classified as Force Majure
are listed in the Contract
 Force Majure
 Typical events are as follows:
1. Act of God: Fire, flood, cyclone,storm,
lightning,hrricane,tornado,earth quake,
landslide, epidemic etc.
2. War, riot,civil war,blockade etc.
3. Strike or lock out (this is normally a highly
debatable issue)
4. Political FM: Acts of Government which
prevent a Party from performing its obligations
 Force Majure
 Procedure is described in detail to give Notice
about Force Majure event
 Affected party is obliged to take all steps to
nullify effect of FM as promptly as possible
 Party claiming FM is expected to keep other
parties informed about status
 If FM lasts for more than predetermined period
then parties can meet to discuss future course of
action including possibilities of Termination of
Contract if required
 Warranties and Indemnities
 Parties shall warrant that they have necessary permits to
create their respective facilities as required under the
Contract
 Seller shall also warrant that it has necessary rights and
title to gas it proposes to sell
 If any party collects tax at applicable rates but fails to
deposit it with authorities then it has to indemnify other
parties for any liabilities that arise to them from such tax
authorities
 Similarly each party will indemnify others from any
liability arising out of inaccurate of representations and
warranties made by that party. Further they are also to
indemnify others from any third party liabilities arising out
of their action and/or inaction
 Termination
 Events of Defaults are listed eg.:
1. Seller’s failure to supply Contracted quantities for a consecutive
predefined period
2. Buyer’s failure to take contracted quantity of gas for a predefined
period
3. Buyer’s failure to pay for gas
4. Prolonged FM event
5. Any party going under liquidation/winding up
6. Material breach of any contractual provisions
 Upon Default notice is given and cure period is given. Failure
beyond cure period can result in Termination
 Rights accrued prior to Termination will survive
 There may be provisions for survival of certain provisions of
Contract even upon Termination for certain period.
 Assignment
 Generally rights and obligations are not allowed
to be assigned by any Party without prior
consent of other parties
 However, for assignment to any Affiliate of a
party is allowed without any prior approval
 Provisions are made to allow assignment of
Contract to lenders/ bankers for purpose of
security against funding done for their
investments
 Miscellaneous
 Entire agreement including annexure
 No amendment without signed agreement
 If any party waives any Right at some time it does not
imply it has waived that Right even in future
 No Party is liable for consequential losses
 Confidentiality-no disclosure except as required by Law
 Severability-If any provision is invalidated under Law
then balance provisions will survive
 Governing Law
 Addresses for issuing Notice
 Survival of certain clauses even on Termination
 Contract signed duly authorized signatories