“Portfolio” LNG SPAs: Who Benefits? - Part 2

Daniel Reinbott's picture
Daniel Reinbott, Partner, Ashurst LLP
Samuel Tan's picture
Samuel Tan, Senior Associate, Ashurst LLP
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In the first part of this article, we considered some of the benefits commonly associated with "portfolio" LNG sale and purchase agreements (SPAs), which permit a seller to supply LNG from multiple sources.

In reality, however, a "portfolio" seller's quest for flexibility and portfolio optimisation may in some cases conflict with a buyer's objectives for certainty and stability of LNG supply.  A buyer should therefore ensure that the relevant SPA terms balance this tension in a fair manner.

For the second part of this article, we dig deeper into how certain "portfolio" SPA provisions on force majeure affecting supply sources and sellers' substitution rights may give significant flexibility to a seller, and also consider some corresponding contractual protections to ensure a buyer's security of supply.

Sellers' supply flexibility; Force Majeure: While "portfolio" sellers will seek to maximise their supply source flexibility, buyers will not want force majeure (FM) affecting a particular supply source to automatically excuse a seller from its delivery obligations.

Where the seller has the right to supply LNG from any source, including exclusively from a single source if it chooses, buyers may want to:

  • prohibit the seller from nominating a particular supply source if it is (or is expected to be) subject to FM; or
  • exclude seller's relief for FM if seller chooses to nominate a new LNG source or project without a proven record of commercial operation.

Where the seller can claim relief from its delivery obligations due to FM affecting an LNG supply source that has been scheduled in the annual delivery program (ADP), in our experience, buyers may also want to:

  • request that FM relief be restricted to cargoes to be delivered in the short term (e.g. 90 days); and
  • require the seller to procure LNG (e.g. on a reasonable endeavours basis) from another available supply source.

In some cases, where the seller is allowed to nominate, and subsequently claim relief for FM, with respect to a "primary supply source" even beyond the then-existing ADP or 90-day schedule (thereby pushing the allocation of FM risk closer to that of a "single-source" LNG SPA), buyers may consider:

  • requiring the seller to procure that the "primary supply source" is, and will continue to be, operated by the seller or its affiliates, or by other reputable LNG project developers; and
  • imposing more information sharing requirements on the seller in relation to the "primary supply source".

Certainty of contracted quantities: A "portfolio" seller (particularly if it is a trader) may want flexibility to substitute its nominated LNG vessels (in the case of DES sales) and/or sources of supply even after the ADP is set.  However, buyers typically require a degree of certainty with respect to the expected delivery quantity for each cargo, as well as the overall quantity of LNG to be delivered in each contract year.

Where the seller can substitute its LNG vessel (subject to the vessel requirements under the SPA) or a supply source at its discretion, a buyer may consider imposing one or more of the following conditions:

  • Seller may not nominate a substitute vessel or supply source such that the expected delivery quantity for the relevant cargo is changed by more than an agreed percentage;
  • Seller may not nominate a change in vessel without a valid operational reason (to be scoped accordingly) and/or the buyer's approval;
  • Substitution of LNG vessels is expressly subject to the operational limitations at the buyer's receiving facility; or
  • Substituted supply sources must satisfy certain specified conditions (e.g. not currently affected by FM, not a supply source which has been newly commissioned etc.); and/or
  • Buyer may also wish to provide for damages to be payable by the seller if it fails to deliver an agreed minimum annual contract quantity of LNG as a result of such substitutions (i.e., the annual contract quantity, subject to certain adjustments[1]).

Conclusion: Agreeing to a "portfolio" SPA offers different benefits for sellers and buyers, and it is important for both parties to understand how these benefits are captured under the terms of the relevant SPA.

Where the interests of seller and buyer may not be aligned, having balanced "portfolio" SPA provisions can help to ensure that the SPA is a mutually beneficial long-term agreement for both parties.

For a buyer, this should go hand in hand with an analysis of the overall delivery track record of the relevant "portfolio" seller.

Join the Conversation: Do you have any questions on “Portfolio” LNG SPAs? Leave your comments below.

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[1]   E.g. in relation to exercise of any upward / downward flexibility, round up/down to get a full cargo lot, and damages otherwise already paid by seller for failing to deliver a cargo.