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LNG CONTRACT STRUCTURE

PETRONET LNG LIMITED


October 27, 2014

Basic Driving Factors & Risks


Basic Driving Factors for the contractSeller Monetization of Gas
Buyer-Securing feedstock/ fuel for facilities

What risks do they bear?


Seller Volume risk (Supply Risk)
Buyer-Price Risk (Market Risk)

Major concerns of Buyer & Seller


Buyers Concerns

Sellers Concerns

Timely Commencement of
Supply

Timely Commencement of
Buyers Facility

Availability of Quantity

Security of Payment

Reliability of Supply

Quantum of Demand

Sustainable Price of Gas

Viable Price of Gas

Flexibilities in off-take of
LNG

Design/ Investments for


Catering to Buyers Needs

Reliability of Transportation
Quality of Gas
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COMMERCE OF LNG

BUYER

LENDER

SPA

SELLER

SHIPPER
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CONTRACTUAL STRUCTURE FOR A REGAS PROJECT

SHAREHOLDERS
LENDERS/ PAYMENT
SECURITY

LNG SUPPLIER

SHIPPING TIME
CHARTER

REGAS TERMINAL

MARITIME
BOARD

GAS OFFTAKERS &


PIPELINE

EPC/ PMC/ PMT


PORT OPERATOR
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Contractual Risks for the Parties


Buyers Risks

Sellers Risks

Volume Risk
Price Risk
Risk of payment
Currency Risk
Risk of flexibility of supply Price Risk
Risk of transport default Risk of aberrant
nominations
Risk of Force Majeure
Risk of project completion Risk of transport default
Risk of Force Majeure
Risk of assignment
Risk of project
Political Risk
completion
Environmental Risk
Risk of Gas quality
Risk of assignment
Political Risk
Environmental Risk
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Role of contracts in financing Buyers projects


Concerns of Buyers Project Lenders
Is a firm Gas supply contract in place ?
Does the contract period match at least the term of
the loan?
Is the Buyer dependent on a single supplier or has
multiple suppliers?
Is the Buyer dependent on a single fuel or has
access to multiple fuels?
Is the price of gas competitive?
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Role of contracts in financing Sellers projects


Concerns of Sellers Project Lenders
What volumes have been booked?
What is the contract period? Does it match at least
the term of the loan?
Is the sale price competitive ?
Is complete contractual structure in place?
Are the cash flows adequate enough to meet the
debt service requirements?
What is the credit-worthiness of the Buyer?

TYPES OF CONTRACT
Long Term SPA/GSPA
Short-Medium Term SPA/GSPA
Spot Master SPA/GSPA with Confirmation notice
HOA & Term Sheets-Binding/Non Binding

CRITERIA FOR SELECTION OF LNG SUPPLIER


Contractual supply rights to produce and sell LNG

- backed by host Government/major supplier

Allocated proven & economically exploitable gas

reserves

Financial/Technical ability to meet implementation

schedule

Existing LNG Liquefaction facilities/new projects


Portfolio supplies vs. Project supplies mix/hybrid

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LNG/GAS CONTRACTS
Articles / provisions could be broadly classified in to four
parts :
1.
2.
3.
4.

General
Commercial
Technical
Legal

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GENERAL ARTICLES IN SUPPLY CONTRACTS

Preamble

Sales & Purchase

Term & Termination

Conditions Precedent

Notices

Details of Performance.

Joint Coordination Committee.

Definitions & Interpretations.

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CONDITIONS PRECEDENT OF BUYER


Authorizations / Approvals / Permissions of respective Govt.,

Management's and Shareholders.

Financial closure for receiving, unloading storage and

vaporization facilities.

Arrangements for design, construction, operation, ownership

and or use of LNG receiving facilities as well as for


transmission network by Buyer and for liquefaction facilities
by Seller.

Creditworthy Market.
Commercial framework.
Arrangement for ships if contract is on FOB basis.

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CONDITIONS PRECEDENT OF SELLER


Authorizations / Approvals / Permissions of respective

Govt., Management's and Shareholders of Seller.

Allocation of adequate gas reserves to supply LNG for

contractual period by the Government/owner of concession


area.

Certification of gas reserves from reputed agency.


Ability to complete financial closure within the given time

period for construction of facilities.

Construction of processing, liquefaction and unloading

facilities by supplier.

Arrangement for shipping for transportation of LNG in case

of Ex-Ship contracts.

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TECHNICAL ARTICLES IN CONTRACT

Sellers & Buyers Facilities


Quality
Measurement and Tests

(With Details on Measurement)

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COMMERCIAL ARTICLES IN LNG CONTRACTS

Sources of Supply.

Taxes, Duties & Charges.

Financing

Quantities.

Invoices & Payment.

Transportation.

Contract Sales Price.

Programming of Deliveries.

Additional Matters.
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LEGAL ARTICLES IN LNG CONTRACTS

Transfer of Title

Liabilities

Amendment & Waiver.

Confidentiality

Sovereign Immunity

No Intermediaries.

Force Majeure.

Assignment

Applicable Law

Arbitration

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FORCE MAJEURE
Events not within Control of affected party not caused by

negligence or willful misconduct, generally inclusive events


like AOG, Strike, War, loss to facilities, acts of Government
preventing ability to perform
Suppliers prefer to include their facilities including upstream

production units and liquefaction facilities, tankers and


reservoirs
Buyers prefer to include Tankers, re-gasification facilities,

Pipelines and downstream consumer facilities


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TITLE TRANSFER
In case of FOB contracts at Load Port
In case of DES Contract- At discharge port/outside the

Customs Frontier
Concern from LNG suppliers
Some suppliers look at CFR Model with invoicing on the
basis quantity unloaded
Taxation and Insurance issues

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CONTRACTUAL QUANTITIES

Annual Contract Quantity

Annual Quantity Deficiency (Make up Gas)

Upward Flexibility.

Make Good Gas.

Restoration Quantities.

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OTHER IMPORTANT COMMERCIAL ISSUES

Additional matters
Status of most favoured buyer
Change in circumstances
Provision of reopener

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LNG PRICING
LNG pricing is the most important clause in Sale Purchase

Agreements.

Success of contract largely revolves around the negotiated

LNG price for long term.

LNG price in Asia Pacific is largely linked with JCC crude

basket.

European buyers have LNG price linked with basket of

crude products and gas.

New buyers prefer fixed price with minor variations

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LNG PRICE
Region

Linkages

North America

Domestic Gas (Henry Hub)

UK

NBP

Europe

Competing Fuels
(Heating Oil, Gas Oil,
Pipeline Gas)

Asia-Pacific

Linked to Imported Crude

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TYPICAL LNG PRICE FORMULA

ASIA PACIFIC LNG FORMUALE


P = S x JCC + C
where,
P
JCC
C
S

=
=
=
=

Ex-ship price of LNG


Japan Custom Cleared Crude Oil, in $ / Bbl
Agreed constant
Slope

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LNG INDEXATION FORMULA Contd...

LNG Price $/MMBTU

Traditional Japanese Formulas

Crude or JCC Values (US$/Barrel)


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LNG INDEXATION FORMULA

Contd...

LNG Price $/MMBTU

LNG Formula with floor & Ceiling

Ceiling

Floor

Crude or JCC Values (US$/Barrel)


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LNG INDEXATION FORMULA

Contd...

LNG Price $/MMBTU

S Curve Indexation formulae

Crude or JCC Values (US$/Barrel)

Lower Slope for JCC/Crude Price lower than A or Higher than

B. Higher Slope between A & B.

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GAS PRICING USA & EUROPE


Natural gas price in Europe and USA are market determined

based on competing fuel price.

In USA Natural gas is indexed to Henry Hub gas price & in UK

to NBP.

Well head price of natural gas is largely based on the demand

supply.

Transportation charges adjusted based on delivered competing

price of natural gas from other sources.

Seasonal variation in gas prices due to demand supply


Rates of gas vary with respect to the volumes.

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FUNDING & PAYMENT RISKS MITIGATION


Trust & Retention Accounts through which all cash flows of

Project Company are routed


Cash Flow Waterfall to Prioritize Payments
Debt Service Reserve Accounts for servicing debts in case

of short term cash flow mis-matches

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PAYMENT SECURITY STRUCTURE

Taxes & Duties


Operating Expenses- Fuel Costs
- Approved O&M Costs
Debt Service

Thank You

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