LNG & Natural Gas Contracts The Terminal Use Agreement

November 2011

Thomas E. Valentine
Macleod Dixon LLP Calgary, Alberta, Canada tom.valentine@macleoddixon.com

Calgary Toronto Moscow Almaty Caracas Rio de Janeiro

TerminalUseAgreement
Terminal Use Agreements ("TUA") are agreements between the Owner of the LNG and the Terminal Operator (the "Operator") the Party that will be processing the LNG back into gas. Pursuant to this Agreement, deliveries are scheduled, and the LNG is offloaded, stored, treated, vaporized and transported to market.
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RegulatedTerminals
There are two types of terminal structures around the world: the regulated arrangement and the non regulated arrangement. A regulated agreement must be used where the terminal operates in a regulated marketplace. Under this arrangement, access to the terminal is available to all; subject only to the approval of the regulator.

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PrivateTerminals
The second type of arrangement occurs when a private entity owns the terminal in a nonregulated jurisdiction. The terminal may be owned by the Project company, or by a third party that then makes capacity available pursuant to private contracts.

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RegulatedTerminals:EssentialTerms
Simply put, a TUA p p prepared in a regulated g jurisdiction is very similar to a regulated utility, such as a gas transmission pipeline. y g Usually the tariff charged is based upon throughput, although in some (such as Lake Charles), the tariff is based on storage.
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TheTermsoftheTUA
Examination of the key terms of a TUA reveal that it is very similar to the SPA. It is also very similar to an agreement for the processing of crude oil or natural gas. The Parties will need to address issues such as the receipt of the LNG, the programming of deliveries, measurement, insurance, testing, force majeure and damages for nonperformance. g p In addition, the TUA must address the issues of berthing vessels offloading.

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Examples:WhereCanILearnMore?
There are a number good sources of tariff documents. The FERC ( d l Energy h C (Federal Regulatory Commission) publishes these on its web site. In the US, examples of TUA arrangements are available t il bl for Cove Point (Maryland), Elba Island (Georgia) and Lake Charles (Boston).
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Examples

In Europe, examples are available for Fluxys (Belgium), National Grid (Grain, UK), and Enagas (Spain). A sample TUA for a private, nonregulated, terminal, will be reviewed in the next unit.

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UnderstandingOpenAccess:AKeyIssue
One important issue is capacity allocation. In the US, the majority of the terminals were closed d i f h i l l d during the 1980s and 1990s and the regulators made open access (the obligation to permit access to every applicant) a condition of re opening. FERC directed that each operator was to publicly post the proposed tariff terms with the public invitation to subscribe.
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KeyIssues
The Terminal Operator was then permitted to hold an open season season (a regulated auction process) to award capacity. Interested parties would be able to propose changes to the terms of the tariff in their bid.

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ProblemswithOpenAccess
In the United States, the open access model has given rise to three major problems. First, there is a large measure of uncertainty regarding the reliability of capacity rights in multicustomer terminals. Second, the nature of the open access bidding process results in a reduced certainty regarding long term rates rates. Third, the ability to trade or assign capacity is severely restricted.
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ProblemswithOpenAccess
Project sponsors are interested in ensuring that their ability to access terminals has certainty and flexibility; the US open access model has not achieved this. As will be seen other jurisdictions have also adopted an open access model, but have modified this structure to increase the access certainty of the terminal user.

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IntercustomerAgreements
The net result of all this is that in regulated markets, there is typically a great deal of negotiation and intercustomer inter customer agreements between customers (as terminal users swap cargos and capacity slots).

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KeyTerms
In your review of the TUA, it is important to carefully examine: quality specifications; li ifi i damages for nonperformance; measurement procedures; nominations and scheduling; offspec LNG; tanker access specifications; and fees for service
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Fees
In the openaccess regulated environment, fees were set by a tariff approved by the regulator regulator. Fees, (also called tariffs), may comprise a capacity reservation charge and a throughput charge (usage) or be based only on actual usage. In the propriety environment fees are negotiated between the terminal owner and the service subscriber.

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Typically, the fee will be high enough to provide the terminal owner with a rate of return slightly higher than that earned within the regulated environment. Fees are often set for the length of the T l h f h Term ( i h (with rights to increase where the costs of the Operator have increased).
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Fees
Customarily, the majority of the fees are payable in any event (use or no use): even if the terminal is under force majeure. However, the terminal user will typically have the right to terminate in a long term force majeure event.

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Scheduling
The terminal operator will need to coordinate scheduling, and will typically give preference to preferred customers. Preferred customers may also seek to obtain a preference in the event that additional offloading slots become available.

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Scheduling
One disadvantage of the openaccess (regulated) model was lack of flexibility in selling or assigning excess capacity. In the proprietary model, the TUAs can provide considerably greater flexibility and permit the capacity holder to assign such rights.

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InterimSummary
The foregoing examines the history of the regulated terminal environment, demonstrates some of the challenges in that environment, and then considers the current move to proprietary terminals. Before leaving this issue, it is important to also examine the tolling structure commonly used.

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TheTollingStructure
As we saw earlier, under this arrangement, the Terminal Operator does not accept title to the LNG. The Terminal Operator simply receives the LNG, processes the LNG back into natural gas and arranges for gas, the transportation of the natural gas to market by pipeline. For this service, the Terminal Operator charges a "toll".
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QuestionsandDiscussion

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