6 - Legal Structure & Commercial Issues For LNG Export

LNG Trading & Logistics
Legal Structure &

Commercial Issues for
LNG Export Projects
Copyright © 2016 International Centre for Training & Development – ICTD. All Rights Reserved. All the content on this document are property of ICTD and may not be reprinted or
reproduce without the permission of ICTD, unless otherwise indicated.
Contents
• What are the common Project Structures in an LNG Export Project ?

• What are the advantages and risks associated with Integrated Upstream
Model?
• What are the benefits and risks of the Merchant Model?
• What are the advantages of the Tolling Model and associated risks?
• What are the common issues associated with export of LNG Projects?
• What are the regulatory requirements to be complied with ?
• What are the Policies and Procedures to be adhered to ?
• What are the factors the stakeholders should consider such as Risk/Reward
Posture, Credit Worthiness of the customer, Regulatory Approvals, etc
What are the common Project Structures

in an LNG Export Project ?
• Three primary project structures for LNG liquefaction projects:

• Integrated Upstream Model: Participants own gas supply and LNG
plant, and market own LNG
• Merchant Model: Project company that owns the liquefaction facility
purchases natural gas from 3d party and sells LNG to off takers
• Tolling Model: LNG plant does not take title to natural gas feedstock or
LNG produced at the plant, but provides liquefaction and processing
services
Integrated Project Model

• In an integrated project, one or more investors own rights to natural gas
reserves.
• Where there is more than one investor, they share the production of the
reserves pursuant to a Production Sharing Contract (PSC) or similar
agreement.
• The parties to the PSC (the PSC Contractors) build the necessary
infrastructure to monetize gas reserves, and the LNG plant is one part of the
integrated project necessary to produce the natural gas, liquefy it, and market
the resulting LNG.
• Each PSC Contractor holds an undivided interest in the LNG plant in
proportion to its ownership of the rest of the project.
4

• Under the Project Company structure, the participants become shareholders
in a new company (usually incorporated in the country where the gas is
located) that finances and owns the LNG plant.
• The project company purchases gas from upstream producers, liquefies the
gas, and resells the LNG to third party purchasers.
• Thus, the project company is the entity that receives revenue from the LNG
sale, and such LNG sales revenues are passed back to the participants
through shareholder dividends.
• The owners of gas reserves also profit from the separate sale of their feed
gas, and such upstream profits are routinely taxed at a rate that varies from
the Project Company’s overall tax rate.
• The following is a graph illustrating the Project Company structure used for
the first train of the Trinidad and Tobago Atlantic LNG project.

• The Project Company structure has also been utilized recently for projects in
Nigeria, Malaysia, Qatar, and Oman.
• Because the assets and liabilities of the LNG project are confined to a
separate entity to which the shareholders contribute significant equity, the
Project Company structure is very conducive to financing.
• Trinidad’s Atlantic LNG, Qatar’s Ras Laffan, and Oman LNG collectively
raised several billion dollars of commercial bank and/or bond financing
utilizing the Project Company structure.
• This vehicle has proved very flexible, as parties are able to participate in
parts of the LNG chain but not in others.
• For example, as a marketing mechanism, Ras Laffan chose to make certain
Japanese companies shareholders for Class B shares in the project
company in order to segregate revenues from the first train’s sales to Japan
from sales supplied by subsequent trains.

• However, from the viewpoint of the participants other than the host
government, the Project Company structure has also had its drawbacks.
• Because a project company is established to own and supply a certain
number of trains, future expansion plans are not addressed at the time of
initial structuring.
• Negotiations for such expansions can be time consuming and distracting.
• Moreover, as foreign participants in projects such as Brunei, Malaysia and
Abu Dhabi have found, when the time comes to expand the initial phase of
the LNG plant, agreement on expansion or extension of the initial phase
typically comes at the price of a smaller equity share for the foreign
participants.
• For instance, in 1977, when the first two trains were built, the Abu Dhabi
National Oil Company’s share was 51%; when agreements were signed in
1997 on extension of the project, its share was increased to 70% and the
foreign participants' shares were correspondingly decreased.
• Typically, each PSC Contractor holds title to its share of LNG production from
the time natural gas is produced from the field until the sale of LNG to a third
party.
• Sales of LNG may occur at the tailgate of the LNG plant (in the case of a CIF
or FOB sale), or at a receiving terminal (in the case of a DAP sale).
• Under an integrated project structure, the equity owners may or may not act
in unison to sell volumes of LNG from the LNG plant.

• If the PSC contractors have the necessary capital to construct the project, an
integrated structure has many benefits.
• These benefits include alignment of interest among the PSC contractors and
the ability to share costs across the entire LNG supply chain, which may be
beneficial for tax reasons and cost accounting reasons
(for example, the PSC Contractors may want to use the early losses from
construction of an LNG plant to offset profits from any natural gas liquids
production, thereby possibly reducing the PSC Contractors' royalty or tax
obligations).
• In addition, in an integrated project, each natural gas supplier (who is also a

PSC Contractor) has control over its own production and is in a better
position take advantage of market opportunities than it would be if the
supplier were bound by a long-term gas supply agreement with a separate
LNG plant company (subject, of course, to any minimum deliverability
obligations).
Common Project Structures

Integrated Upstream Model
Physical Assets Ownership Leases/ Licenses
Upstream Oil and Gas Assets

Joint Operating
Agreement(s)
Gas Producers
Gas
LNG Liquefaction Plant, EPC Contracts

Common Facilities, and
Loading Port
Joint Marketing
LNG Agreement
LNG Sale and

LNG Off take LNG Buyers Purchase
Agreement(s)
What are the advantages and risks associated with

Integrated Upstream Model?
• Benefits:
• Alignment of interest throughout value chain
• May have tax and accounting benefits (may be able to use early losses
from LNG plant construction to offset revenues from natural gas or liquids
production)
• Promotes finance ability by reducing cross-default risk
• Each gas supplier may control its own marketing
• Risks:
• Requires identical ownership of upstream and downstream assets
(structuring with Train Cos can allow future trains with separate
ownership)
• Example: Alaska Gas line
Merchant Model
• Under a Project Company Model, the company that owns the LNG facility
(Project Co.), unlike the PSC Contractors described above, does not
have an interest in the upstream assets.
• Instead, Project Co. owns the LNG plant. Project Co. purchases natural
gas as feedstock for the plant, processes that natural gas into LNG, and
sells the LNG to one or more buyers on an FOB, CIF, or DAP basis for
Project Co.'s own account.
Merchant Model
• There are many variations of the Project Company Model.
• In some cases, the entities that own Project Co. will also own the upstream
facilities.
• In other cases, there is not a unity of interest along the LNG supply chain.
• For example, a project may be structured so that, although the natural gas
supplier(s) are not identical to the group that owns Project Co., most of the
owners of the upstream natural gas supplies are owners of the LNG
liquefaction facility.
15
Merchant Model
• In yet another variation, a governmental entity may own Project Co. (directly
or through the state-owned national oil company), while an operating
company owned by the upstream PSC contractors (e.g., in proportions that
are substantially similar to their ownership of the upstream supplies) operates
the facility.
Merchant Model
• There may be several reasons for structuring Project Co. as a separate
company even where there is a unity of interests in the LNG supply chain.
• For example, tax considerations may require a distinct company with
separate profit (or loss) from its operations, or local law may require the
LNG facility to be owned by a governmental entity.
• Commercial considerations may also dictate the use of a project company
model.
• If the upstream owners are unable (or unwilling) to invest in the liquefaction
facility, a separate project company may be merited.
• In other cases, some owners of the plant may not have an interest in the
upstream supplies, so an integrated project model will not be possible
Common Project Structures

Merchant Model
Physical Assets Ownership Contracts
Lease/License/
Gas Producers JOA
Gas Sales
Agreement(s)
Gas
LNG Liquefaction Plant, Project

Common Facilities, and Company EPC Contract
Loading Port
LNG
LNG Sale and
Purchase
LNG Buyers Agreement(s)
LNG Offtake
Merchant Model
• The fiscal regime in the project country defining when the first commercial
sale of hydrocarbons occurs may also influence the sponsors' selection of a
project company model.
• Although the project company model may be useful to address legal
and commercial considerations, it does impose some risk on Project
Co.
• Among the most significant of those is the commodity pricing risk that Project
Co. takes in purchasing natural gas and selling LNG.
• For example, because LNG is sold by Project Co., which is a separate entity
from the party that produced the natural gas, Project Co. must purchase
natural gas from the upstream producers (or some intermediary party)
pursuant to a gas supply agreement.
Merchant Model
• If the upstream suppliers are not owners of Project Co., negotiation of
the gas supply agreement could prove more cumbersome, and an
upstream supplier may force an undesirable allocation of market risks
on Project Co. through the pricing mechanisms in the gas sales
agreement.
• For example, the gas sales agreement may include a netback price based
upon the sale price of LNG from the project or may include a participating
economic interest in the revenues of Project Co.
• The use of a project company model reduces somewhat the flexibility of each
equity holder with respect to the production of natural gas and disposition of
LNG, because all sales are made in unison through Project Co.
• However, making such sales on a unified basis simplifies issues related to
the management and allocation of the capacity of the LNG plant
Merchant Model
• Even though the sales are made in unison, a variety of LNG sales
arrangements are available.
• In most circumstances, Project Co. sells LNG to third parties under a
long-term LNG sale and purchase agreement (SPA), with Project Co.
taking the upside and downside commodity risks associated with
buying natural gas and marketing LNG.
• An alternative to this approach is for Project Co. to sell LNG on an FOB basis
to the project sponsors, which are responsible for lifting and marketing LNG
in proportion to their equity shares of Project Co.
• Depending on the pricing structure, such an arrangement could reduce
volatility risk to Project Co., thereby enhancing the predictability of the
revenue stream.
What are the benefits and risks of the Merchant Model?
• Benefits:
• Allows Project Co. to generate potentially higher returns based on value
of LNG/gas price spread
• Allows Project Co. sponsors greater control in sourcing gas and
marketing LNG
• Risks:
• Project Co. assumes market and counterparty default risks both
upstream and downstream
• Requires Project Co. to obtain finance for plant construction based on
LNG sales and project revenues
• Examples: Sabine Pass, Golden Pass, several BC projects
TOLLING MODEL
• Under a Tolling Model, the company owning the LNG liquefaction facility (Toll
Co.) does not take title to the natural gas that is processed.
• Instead, Toll Co. receives a fee (the Tolling Fee) to provide the service of
processing natural gas owned by a producer or a purchaser of LNG.
• Under a typical tolling structure, the owners of the natural gas sell their
natural gas (as LNG) to a downstream buyer at the tailgate of the LNG plant.
• As with other project models, there are variations of the tolling structure.
• For example, in one possible arrangement, Toll Co., while still receiving
the Tolling Fee, takes title to the LNG and is the FOB seller of the LNG.
• This hybrid arrangement, sometimes referred to as "quasi-tolling,"
allows Toll Co. to share in pricing upside while the Tolling Fee insulates
Toll Co. from price risk.
Common Project Structures Tolling Model

Gas Producers Leases/ Licenses

Joint Operating
Gas Agreement(s)
LNG Liquefaction Plant, Tolling

Common Facilities, and Company EPC Contracts
Loading Port
Liquefaction
LNG Tolling
Agreement(s)
LNG Buyers LNG Sale and

LNG Offtake
Purchase
Agreement(s)
TOLLING MODEL
• As illustrated in Figure 3, a principal benefit of a tolling structure is the
minimization of market risk to Toll Co. through the predictable payments of
the Tolling Fee.
• A typical Tolling Fee structure is a two-part fee.
• The first part of the two-part fee is a reservation charge paid to ensure
that the LNG plant has the necessary capacity to liquefy a natural gas
owner's natural gas on a regular basis (e.g., monthly) and is payable
whether or not any natural gas is actually liquefied.
• This reservation fee would allow Toll Co. to recover fixed costs, as well as a
return on capital.
TOLLING MODEL
• The second fee (e.g., a commodity charge) may be assessed per unit of
natural gas processed.
• This fee would recover the variable costs associated with processing the
natural gas.
• By structuring the Tolling Fee this way, Toll Co. minimizes its market risk
(including price volatility), since the reservation charge is payable irrespective
of whether any LNG has been produced or any sales of LNG have been
made by the owner of the LNG to offtakers.
Common Project Structures Tolling Model

Gas Producers Leases/ Licenses

Joint Operating
Gas Agreement(s)
LNG Liquefaction Plant, Tolling

Common Facilities, and Company EPC Contracts
Loading Port
Liquefaction
LNG Tolling
Agreement(s)
LNG Buyers LNG Sale and

LNG Offtake
Purchase
Agreement(s)
TOLLING MODEL
• A tolling structure may be appropriate where there is uncertainty of natural
gas supply or of downstream markets.
• In such a case, the upstream supplier may be willing to bear the risk by
committing to the Tolling Fee in exchange for Toll Co.'s investment in
the project.
• This would also be the case if the project sponsors wish to attract outside
investors to the project.
• A tolling structure may also be appropriate as an alternative to an integrated
project if the project sponsors anticipate receiving supply from multiple fields
or in circumstances where the local tax regime imposes taxes that could
apply in the other structures (for example, a tax on title transfer).
• Finally, a tolling structure can facilitate project financing to the LNG plant
since the project revenues are not directly exposed to market risks.
What are the advantages of the Tolling Model and

associated risks?
• Benefits:
• Avoid commodity price and marketing risks
• Allows flexibility in ownership does not require that all upstream parties
be owners of LNG plant
• Reduced risk can help project financing of LNG plant, if the tolling
customers have sufficient creditworthiness
• Risks:
• Sponsors do not profit from LNG sales
• If the gas supplier (Toller) is an affiliate of sponsor, security and cross-
default issues can affect financing
• Examples: Jordan Cove, Cameron, Freeport, Cove Point, Lake Charles, Gulf
Coast, Gulf LNG, Elba Island
What are the common issues associated with export

of LNG Projects?
• WHAT AGREEMENTS ARE KEY TO TYPICAL EXPORT LNG PROJECT
STRUCTURES?
• The exact agreements necessary for implementing an LNG project will to a
great extent be a consequence of the structure chosen by the LNG exporter -
either Project Company, Tolling Company, Non-Incorporated Joint Venture, or
an alternative structure.
• Even though practice varies between countries, the key agreements in
the Project Company structure include following:
• Project Development Agreement covering overall structure of the project ·
Documents establishing Project Company (Articles, By-Laws, etc.) ·
Shareholders Agreement for Project Company · Technical Service
Agreements between Project Participants and Project Company · Feed Gas
Sales Agreements between Gas Owners/Producers and the Project
Company
What are the common issues associated with export of LNG

Projects? Project Company
• LNG Sales and Purchase Contracts between Project Company and Buyers ·
Financing Agreements between Lenders and Project Company ·
• LNG Plant Construction Agreement between Project Company and EPC
Contractor ·
• Time Charters or Voyage Charters (if tankers not owned by Project
Participants)
• Shipbuilding Agreements and Ship Operation Agreements (if tankers owned
by Project Participants)

Projects? Tolling Company
• For the Tolling Company structure (as being implemented by Indonesia), the
key agreements include the following:
• Production Sharing Contract (PSC)
• Principles of Agreement supplementing the PSC for LNG project purposes
• Joint Operating Agreement between/among Production Sharing Contractors
• Documents establishing Tolling Company (Articles, By-Laws, etc.)
• Shareholders Agreement for Tolling Company (confirming non-profit status)
• Plant Use and Operation Agreement between PERTAMINA and Tolling Company
• Processing Agreement between/among Tolling Company and gas
owners/producers
• Technical Service agreements between/among PSC Project Participants and
Tolling Company

Projects? Tolling Company
• Gas Supply Agreements between/among Gas Owners/Producers and

PERTAMINA
• LNG Sales and Purchase Contracts between/among PERTAMINA and Buyers
• Financing Agreements between/among Lenders and Trustee Borrower
• LNG Plant Construction Agreement between PERTAMINA and EPC Contractor
• Time Charters or Voyage Charters (since tankers are not owned by Project
Participants)
What are the common issues associated with export of

LNG Projects? Non-Incorporated Joint Venture Company
• Joint Venture Project Agreement covering overall structure of the project11
• Service Agreements between/among certain Project Participants and
Operator ·
• Gas Recycling Joint Venture Agreement between/among Joint Venture
Participants ·
• LNG Plant Operation Agreement between Plant Operator and Joint Venture
Participants ·
• LNG Sales and Purchase Contracts between each Joint Venture Participant
and each Buyer ·
• LNG Plant Construction Agreement between Plant Operator and EPC
Contractor ·
• Shipping Agreement covering overall shipping structure · Documents
establishing Shipping Company (Articles, By-Laws, etc.)

Projects?
Non-Incorporated Joint Venture Company
• Shareholders Agreement for Shipping Company between/among all Joint

Venture Participants ·
• Shipping Service Agreement between Shipping Company and separate
Management Company ·
• Time Charters (for tankers not owned by Joint Venture Participants)
What are the regulatory requirements to be

complied with
• Regulatory Regime Overview
• Satisfying regulatory requirements may require significant investment of
time and resources.
• In the United States, Section 3 of the Natural Gas Act ("NGA")
governs construction of export facilities and export of LNG.
• Primary regulatory authority under NGA:
• FERC: LNG facility sitting authority.
• Department of Energy ("DOE"): Approval for exports of the
commodity.
• Pipelines governed by Section 7 of the NGA.
• FERC: Regulation of pipelines.
What are the Policies and Procedures to be adhered to ?
• DOE Export Authorization

• DOE required to authorize the export unless it finds the proposed
exportation "will not be consistent with the public interest."
• Exports to a country that has entered into a Free Trade Agreement
("FTA") with the United States deemed to be within the public interest.
• Presently, only one license granted by DOE for LNG export to non-FTA
countries.
• Granted to Cheniere Energy.
• 16+ applications pending
What are the Policies and Procedures to be adhered to ?
• Policy Issues
• Dec. 5, 2012, DOE releases NERA study on LNG exports:
 “Across all ... scenarios, the U.S. was projected to gain net economic
benefits from allowing LNG exports. Moreover, for every one of the
market scenarios examined, net economic benefits increased as the
level of LNG exports increased. In particular, scenarios with unlimited
exports always had higher net economic benefits than corresponding
cases with limited exports.”
• Comments due Jan. 25; reply comments Feb. 24
• DOE to consider first those applications for which FERC has given
approval to commence pre-filing for FERC license
• EPA & Sierra Club urge DOE review of upstream impacts
 Both FERC and the 2d Circuit Court of Appeals have rejected similar
arguments
Promoting Your Project's Success :

What can Applicants do ?
• Build a record at DOE that supports favourable decision and can withstand
appeal by opponents
• Diligently progress FERC license filing -- DOE has shown an interest in
prioritizing those applications that are moving forward with FERC
• Secure long-term creditworthy customers
• DOE Guidelines (1984) emphasize role of market
• Long-term agreements with creditworthy off takers shows market support,
commitment of sponsors, and likely finance ability
• Conversely, projects with no customers, contracts or capital miss an
opportunity to demonstrate they are real
What are the factors the stakeholders should consider

such as Risk/Reward Posture, Credit Worthiness of the
customer, Regulatory Approvals, etc ?
• Sponsors should carefully consider their risk/reward posture, and that of

their investors and lenders
• Select the appropriate structure; changes later can increase costs,
impede marketing, and cause delays in financing
• Focus on obtaining creditworthy customers -- both capital and regulatory
approvals are likely to follow strong financials
• Align contract terms to reflect structure, comply with licenses, and
promote project commercial and financial success
What are some additional common structuring issues?
1) Project Participation.
• What entities will participate in the project?
• What form will that participation take? These are central structuring
questions. Gas suppliers, LNG purchasers, the exporting country’s
government, trading companies and many others vie for an ownership
interest in the export project, either through the LNG plant or otherwise.
• Likewise, the exporting country’s government and local individuals, as well as
LNG buyers and gas suppliers, at times attempt to gain an interest in LNG
vessels.
• Furthermore, a multitude of players may seek to own an interest in the LNG
receiving terminal and related power and distribution facilities.
What are some additional common structuring issues?

• b) Government Oil and Gas Company. Obviously, the local government
will, given its typical ownership interest in the natural gas, choose to
participate in the export phase of the project.
• Issues often arise, however, when the financial condition of the Government
Oil and Gas Company does not allow it to support the project in the same
manner as the other participants.
• c) Other Local Companies. LNG projects are prestigious and profitable.
Companies with significant local political leverage often seek to become
involved in the project, through ownership of an LNG tanker, participation in
the production sharing contract or license, or as a major supplier or
contractor.
• Their introduction, especially at a late stage in the process, can severely
complicate the structure, especially if the local company’s balance sheet
requires support or financial guarantees.
What are some additional common structuring

issues?
• D) Trading Companies. Particularly in the Asian trade, trading companies
play an important role in facilitating the sale of LNG.
• These trading companies do not purchase the LNG but assist in identifying
the market and in finalizing the details of the trade.
• Most LNG projects in Asia have at least a small percentage that is owned by
a trading company based in the main importing country.
• For example, Mitsui and Mitsubishi are Japanese trading companies that
together own a one-sixth interest in the Australian Northwest Shelf Project,
and a Korean company, SK Corporation, owns an 8.38% interest in the
developing Yemen LNG Project.

issues?
2) Extensions.
• As mentioned above, future expansion plans are often not addressed by the
project sponsors from the outset.
• In particular, in the event the parties decide to structure the project so that all
gas suppliers (existing or additional) will participate in the same manner as
they did for the initial phase of the project, well-considered approaches to
such expansions will be needed.
• Discussions on the expansion of the Atlantic LNG Project, for example, took
more than one year before agreement could be reached between the
Trinidad and Tobago government, the LNG Project owners, and gas
suppliers.

issues?
• 3) Sanctions. Some countries that have an abundance of natural gas
reserves (e.g. Libya and Iran) are subject to certain governmental sanctions
which may prevent certain companies from participating in the project.
• 4) Governmental Approval Issues. The decisions of the LNG purchaser’s
government with regard to the site of the receiving terminal may affect other
parts of the LNG chain and the overall structure.
• On at least two occasions the importing country’s government has, after
much debate, been unwilling to approve the necessary facilities to import
LNG.
• 5) Tax Issues. Whether the Tolling Company, Non-Incorporated Joint
Venture, Project Company or another approach is followed, tax issues
(Income tax, VAT on processing, transportation taxes, transfer pricing issues,
double taxation, etc.) often have a great influence on the final structure
adopted.
Issues common to negotiating and documenting LNG

Projects
• A. Force Majeure Risk. Despite the fact that force majeure events are rare,
an inordinate amount of negotiation time is devoted to allocating force
majeure risk.
• In LNG Sales and Purchase Contracts, the norm is to include a detailed list
of events that will qualify as force majeure events and therefore suspend a
party’s performance obligations during such force majeure period.
• Because the majority of recent LNG projects have been project financed,
lenders in particular are very concerned about the circumstances which could
result in the LNG buyer being relieved from its obligation to take or pay for
LNG.
Issues common to negotiating and

documenting LNG Projects
• Force majeure risk is also addressed in important project documents, such
as Time Charters, Financing Agreements, Construction Contracts, Gas
Supply Agreements, and the buyer’s gas and power sales agreements.
• For example, it may be necessary for the time charterer to establish a
standby letter of credit in favour of the vessel owner to secure the time
charterer’s obligations to pay hire during a force majeure preventing
utilization of the LNG tanker.
• Counsel and negotiators must carefully craft and harmonize these
agreements to ensure that a sensible and workable allocation of force
majeure risk is achieved.

Projects
• B. Maritime Issues. Experience has shown that maritime issues affecting the
LNG trade are frequently downplayed by negotiators and counsel at the
commencement of sales contract negotiations; eventually, maritime issues
often rise to the forefront of the negotiations.
• In fact, in some cases maritime issues may even prevent the LNG sale from
being finalized, such as in the case where there is a clash between the LNG
exporter’s policy to only sell on a delivery ex ship basis (i.e. where seller
provides transportation and bears the risk of loss) and the LNG importer’s
policy to only purchase on an FOB basis (i.e. where buyer provides
transportation and bears the risk of loss).
Issues common to negotiating and documenting

LNG Projects
• C. Community Relations. Depending on the location of the LNG plant or

LNG receiving terminal, a variety of local community issues may arise.
Project developers must be keenly aware of the concerns of such local
populations and the project participants’ plans to address them.
• Even during the relatively short history of the LNG trade, receiving terminals
have been cancelled or adversely affected due to local opposition by
fisherman and environmentalists, and LNG plants have been adversely
affected by labour issues or have been threatened by rebels who view the
LNG plant as a government target.

LNG Projects
• D. Pricing Disputes. Buyers of LNG wish to ensure that the quantity
purchased under a particular contract remains price-competitive over the
long term with other sources of LNG and with alternative fuels.
• Sellers, on the other hand, wish to see the highest value possible received for
their product so that development costs and any financing costs can be
reimbursed along with seller receiving an acceptable rate of return for the risk
taken.
• These differing points of view not only result in lengthy debates in connection
with sales negotiations but they may also impact other project activities.

LNG Projects
• E. Governmental Action. Since government approvals of an LNG project

are always a condition precedent to finalizing the project, such approvals
should be obtained early to avoid unfavourable impacts.
• The extent of such approval could be as simple as a one page letter from a
Governmental Minister approving the project or as complicated as
comprehensive legislation.

• F. Construction Completion Risk. Given the preference today to project
finance the construction of the LNG plant, it is imperative that negotiators and
counsel ensure that the construction completion risk is properly addressed.
• Sensible liquidated damages and performance warranties are needed to
ensure the Contractor is properly motivated to complete the construction
timely to the highest standards, while at the same time allowing the
contractor to manage the level of risk it assumes.
• Typical liquidated damage levels in recent LNG plant construction contracts
generally range between 10-20 percent of the lump-sum EPC contract price.

G. Financing.
• The 1996 bond offering by Ras Laffan ushered in a new era in LNG plant
financing.
• Although the current state of the bond market does not appear favourable for
additional LNG bond offerings, the success of the LNG industry and its huge
appetite for funds will inevitably lead to further bond offerings to finance LNG
plants and other facilities.

Projects
• H. Decision-Making in Project Company.

• Given the divergence of participants in an LNG export or import project,
negotiators and counsel should not fail to put into place clear and well-
conceived decision-making provisions in relation to the project company (e.g.
addressing who will be the voice of the project for marketing purposes, how
budgets and other capital costs will be approved, how expansions of the
project will be decided, whether the parties will operate through employees or
secedes, etc.).
• I. Law Applicable to Contracts. The choice of the law that will govern the
contractual agreements for the LNG project will have significant effects on
negotiations and documentation. Consideration should be given to whether
the law chosen clearly provides the necessary legal foundation.
• J. Letters of Intent.
• Given the long lead times necessary to negotiate the various documents
needed to implement an LNG project, Letters of Intent, Heads of Agreement,
memoranda of understanding and other preliminary understandings are often
signed.
• Such preliminary understandings aid in cementing the relationship between
the parties concerned and focusing the participants on immediate issues to
be addressed. However, counsel and negotiators should carefully monitor the
use of such letters of intent and preliminary understandings to determine the
extent to which they are enforceable.
• Often such documents do not contain choice of law provisions or language
clarifying if the parties intend that the preliminary understandings are to be
binding.

6 - Legal Structure & Commercial Issues For LNG Export

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

6 - Legal Structure & Commercial Issues For LNG Export

Uploaded by

Copyright:

Available Formats

LNG Trading & Logistics

Legal Structure &

• What are the common Project Structures in an LNG Export Project ?

What are the common Project Structures

• Three primary project structures for LNG liquefaction projects:

Integrated Project Model

Integrated Project Model

Integrated Project Model

Integrated Project Model

Integrated Project Model

Integrated Project Model

Integrated Project Model

• In addition, in an integrated project, each natural gas supplier (who is also a

Common Project Structures

Physical Assets Ownership Leases/ Licenses

Upstream Oil and Gas Assets

LNG Liquefaction Plant, EPC Contracts

LNG Sale and

What are the advantages and risks associated with

Common Project Structures

Upstream Oil and Gas Assets

LNG Liquefaction Plant, Project

What are the benefits and risks of the Merchant Model?

Common Project Structures Tolling Model

Gas Producers Leases/ Licenses

LNG Liquefaction Plant, Tolling

LNG Buyers LNG Sale and

Common Project Structures Tolling Model

Gas Producers Leases/ Licenses

LNG Liquefaction Plant, Tolling

LNG Buyers LNG Sale and

What are the advantages of the Tolling Model and

What are the common issues associated with export

What are the common issues associated with export of LNG

What are the common issues associated with export of LNG

What are the common issues associated with export of LNG

• Gas Supply Agreements between/among Gas Owners/Producers and

What are the common issues associated with export of

What are the common issues associated with export of LNG

• Shareholders Agreement for Shipping Company between/among all Joint

What are the regulatory requirements to be

What are the Policies and Procedures to be adhered to ?

• DOE Export Authorization

What are the Policies and Procedures to be adhered to ?

Promoting Your Project's Success :

What are the factors the stakeholders should consider

• Sponsors should carefully consider their risk/reward posture, and that of

What are some additional common structuring issues?

What are some additional common structuring issues?

What are some additional common structuring

What are some additional common structuring

What are some additional common structuring

Issues common to negotiating and documenting LNG

Issues common to negotiating and

Issues common to negotiating and documenting LNG

Issues common to negotiating and documenting

• C. Community Relations. Depending on the location of the LNG plant or

Issues common to negotiating and documenting

Issues common to negotiating and documenting

• E. Governmental Action. Since government approvals of an LNG project

Issues common to negotiating and

Issues common to negotiating and

Issues common to negotiating and documenting LNG