It has become increasingly common for mid-to-long term liquefied natural gas (LNG) sale and purchase agreements (SPAs) to give sellers flexibility to supply LNG from multiple sources (i.e. a "portfolio" SPA), as opposed to supply from a dedicated project. This trend looks set to continue as LNG traders grow their influence in the LNG market.
In the first part of this 2-part article, we consider some of the benefits which are commonly touted to attract parties to agree a "portfolio" SPA, while Part 2 will subsequently elaborate on how key SPA contractual provisions could impact the actual extent of these benefits.
LNG Sellers' perspective:
- Right to supply from multiple sources: "Portfolio" SPAs give a seller the right to supply its buyer with LNG from multiple supply sources.(1) The seller, therefore, has more flexibility to optimise its supply and/or exploit short term trade opportunities for profit (e.g. arbitrage, distressed cargo sales, favourable location swaps, cost-blending and shipping cost savings etc.) (Portfolio Optimisation Benefits).
- Control over shipping: "Portfolio" SPAs are typically delivered on an ex-ship (DES) basis with the seller responsible for and controlling the shipping of the LNG cargoes. In addition to giving sellers potential Portfolio Optimisation Benefits, this also provides possible economies of scale for a seller in owning, chartering and/or managing a fleet of LNG vessels.
- Potential support for greenfield liquefaction projects: "Portfolio" SPAs may also be used to help liquefaction project developers support their planned projects where there are some uncertainties in terms of timing, technology, downstream demand or resources for the project.(2) Once the relevant uncertainties are alleviated, the seller may then shift the main supply source under the SPA to the greenfield project.
LNG Buyers' perspective:
- Diverse supply; security of supply: Diversification and security of supply is a common key objective for LNG buyers, and a "portfolio" SPA potentially offers an advantage over a dedicated source LNG SPA as the seller is not constrained from supplying LNG from a single project.
- Price competitiveness: "Portfolio" sellers have more flexibility (and are usually more willing) to offer contract prices based on a blend of oil-linked index and Henry Hub gas pricing when compared to sellers from dedicated LNG supply sources outside of the US. This has been attractive to buyers who anticipate cheaper long-term US gas prices, or who generally wish to diversify their price exposure.
- Contract start date – certainty and timing; Duration: Buyers who are procuring LNG to support a new LNG market or particular downstream project which is being constructed are also likely to value the additional timing flexibility that "portfolio" sellers can typically offer in relation to delivery start dates and overall contract duration.
- However, whilst there may be compelling benefits for both buyers and sellers to agree a "portfolio" SPA, the provisions which allocate key risks under the contract need to be considered carefully by a buyer to understand how much of these purported benefits it will actually reap.
- In particular, buyers should understand the extent to which the "portfolio" seller may claim relief from its delivery obligations due to a force majeure event affecting a supply source, as well as how a seller's flexibility to substitute its LNG vessels or supply sources may impact the buyer's certainty of supply. These and other issues will be covered in further detail in Part 2 of this article, along with some specific examples of SPA provisions to bear in mind.
Notes: (1) Many SPAs from international traders expressly state that LNG may be supplied from "any source" (i.e. not just its "equity" portfolio, but also its "traded" portfolio). (2) Although such SPAs may not necessarily be suitable to support a limited recourse liquefaction project financing.
Join the Conversation: Could an LNG "portfolio" SPA give additional flexibility for sellers but still impose risks associated with a dedicated source SPA on buyers? Leave your comments below.
Daniel Reinbott, Partner at Ashurst LLP spoke about LNG contracting & pricing at Gastech last year. Is this your area of expertise? Submit a Contracting, Pricing & Trading of Gas & LNG Abstract in order for The Gastech Governing Body to review and then vote on the successful chosen papers. Gastech 2017 takes place at the Makuhari Messe Chiba, Tokyo in Japan from 4 to 7 April 2017.
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