What "new" LNG buyers want

Daniel Reinbott's picture
Daniel Reinbott, Partner, Ashurst LLP
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The number of buyers active in the LNG market, including those with plans to purchase LNG and/or develop LNG receiving terminals, has grown rapidly in recent years and the current LNG market arguably provides a unique opportunity for first-time buyers.

In addition to technical, regulatory and other issues, new LNG buyers face many commercial challenges and associated risks, including:

  • uncertainties in terms of timing and demand (two interrelated challenges); and
  • dealing with being the 'new kids on the block'.

Whilst some of these challenges do not only affect new buyers, new buyers typically face all of these issues simultaneously when trying to establish their LNG value chain.

There are a number of provisions in LNG sale and purchase agreements (LNG SPAs) which new buyers tend to focus on in an attempt to address, at least in part, these challenges.

Buyer flexibility - Timing: New LNG buyers often look to achieve more flexibility in the commencement mechanics for first deliveries under an LNG SPA. This can be achieved through:

  • Window narrowing mechanisms: scheduling first deliveries by reference to completion of the buyer's receiving facilities, rather than a seller's liquefaction project, as has traditionally been the case;
  • Longstop dates: more generous longstop dates and longer 'windows' to provide an additional buffer between the scheduled completion date for the buyer's facilities and the LNG delivery start date; and
  • Fixing dates in LNG SPA: confirmation of the window narrowing mechanism and longstop dates at signing of the LNG SPA, with only indicative dates being specified in the HoA.

Buyer flexibility - Quantity: As a practical measure, new buyers will often seek to commit to smaller contract quantities of LNG, in order to avoid over-contracting where there are concerns with initial demand. Additional contracts may then be pursued in the future, with the same or different seller, when demand increases or becomes more certain (i.e., 'tranche-by-tranche' procurement).

New buyers will also look for additional flexibility in their take-or-pay obligations under the LNG SPA, such as through:

  • Ramp-up: an agreed mechanism to increase annual quantities (starting from a lower base) over a number of contract years until a 'Plateau ACQ' is reached
  • DQT/UQT: higher degrees of annual and cumulative quantity flexibility through downward and upward quantity tolerance;
  • Diversions: cargo diversion rights and destination flexibility; and
  • Cargo cancellation: cargo cancellation rights in return for payment of a cancellation fee.

Buyer credit support: A first-time LNG buyer importing LNG into a new market presents a very different risk profile to that of an established utility buyer. This places increased focus for sellers on the need for buyer to provide credit support under the LNG SPA. Parent company guarantees have historically been a common form of credit support for LNG SPAs. However, parent companies of new buyers may not be willing or have the requisite credit rating to provide a PCG. The use of standby letters of credit, often sized to cover the value of an agreed number of cargoes, has increased in recent years, particularly for new buyers in the Asia-Pacific region.

Conclusion: Benefits for LNG sellers?

Accommodating what new buyers want requires significant support from LNG sellers. However, there are potential rewards for sellers who are willing to do so. First-time LNG buyers offer sellers the opportunity to increase their sales volumes by accessing and developing new markets - in some cases giving such sellers a valuable first mover advantage. New markets and buyers can also increase the opportunities for a LNG seller to optimise and profit from its portfolio of LNG supply sources.

Do you agree with Daniel? What do new LNG buyers want? Leave a comment below.

Daniel presented at the Gastech conference last year. To know more about what LNG buyers and sellers want, attend next year’s event: Gastech Japan 2017.

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