The document focuses on the formulation and essential elements of LNG and gas contracts, emphasizing the need for careful drafting to mitigate risks and ensure compliance with legal requirements. It outlines typical objectives of gas contracts, such as ensuring supply security and defining pricing principles, while detailing critical components such as performance measures, remedies for default, and dispute resolution mechanisms. Furthermore, it addresses the significance of clarity in objectives, fairness in negotiations, and the collaborative roles of involved parties in contract implementation.

1. COURSE ON LNG
COURSE ON LNG
BUSINESS
BUSINESS
Session-5
Session-5
Gas/LNG contracts- basic
Gas/LNG contracts- basic
principles in their formulation
principles in their formulation

2. LNG value chain linkages
LNG value chain linkages
Gas producer
Pipeline
LNG plant Shipping
Regas terminal
Pipeline User 1
User
User n
Gas seller

3. What is a Contract?
What is a Contract?
 Contract is a document which contains legally
Contract is a document which contains legally
binding rights and obligations of Parties which
binding rights and obligations of Parties which
are signatories to the Contract
are signatories to the Contract
 Contracts are required to be carefully drafted in
Contracts are required to be carefully drafted in
gas business to ensure proper risk mitigation in
gas business to ensure proper risk mitigation in
a value chain (balancing of rights and
a value chain (balancing of rights and
obligations under different contracts)
obligations under different contracts)
 Proper drafting of Contracts is very necessary
Proper drafting of Contracts is very necessary
for ensuring financial closure of various projects
for ensuring financial closure of various projects
in LNG/ Gas value chain
in LNG/ Gas value chain

4. Typical Objectives of Contract
Typical Objectives of Contract
 To ensure supply security (Quantity, Quality and duration
To ensure supply security (Quantity, Quality and duration
of supply)
of supply)
 To define pricing or valuation principles and formulae in
To define pricing or valuation principles and formulae in
unambiguous terms (linkage to various references and
unambiguous terms (linkage to various references and
the manner in which they are to be used)
the manner in which they are to be used)
 To understand and ensure compliance to the
To understand and ensure compliance to the
requirements of Laws (especially when it involves Parties
requirements of Laws (especially when it involves Parties
in different countries)
in different countries)
 To clearly define events of Default and the remedies to
To clearly define events of Default and the remedies to
cure events of Default
cure events of Default
 To clearly define the flexibilities required in fulfilling the
To clearly define the flexibilities required in fulfilling the
obligations
obligations
 To clearly define mechanisms for Dispute Resolution
To clearly define mechanisms for Dispute Resolution
 To define limits of Liability
To define limits of Liability

5. Basics of Contract formulation
Basics of Contract formulation
 To identify the basic objectives and
To identify the basic objectives and
requirements of proposed Contract
requirements of proposed Contract
 To understand the interphases involved between
To understand the interphases involved between
different Parties involved to fulfill the desired
different Parties involved to fulfill the desired
objectives
objectives
 To identify the risks involved or events which
To identify the risks involved or events which
could jeopardise the fulfillment of desired
could jeopardise the fulfillment of desired
objectives
objectives
 To involve a Lawyer and explain to him the
To involve a Lawyer and explain to him the
technical and commercial requirements of the
technical and commercial requirements of the
Contract (as per your defined objectives) and
Contract (as per your defined objectives) and
ask him to draft the document by understanding
ask him to draft the document by understanding
the applicable Laws to all Parties concerned.
the applicable Laws to all Parties concerned.

6. Basics of Contract formulation
Basics of Contract formulation
 Have absolute clarity about objectives
Have absolute clarity about objectives
 Ensure unambiguous wordings
Ensure unambiguous wordings
 Contract is a long term relationship and it
Contract is a long term relationship and it
needs to be sustainable.
needs to be sustainable.
 Hence do not try to be too smart and have
Hence do not try to be too smart and have
one sided agreement.
one sided agreement.
 Try to be fair in negotiating various
Try to be fair in negotiating various
provisions of contract so long as it does
provisions of contract so long as it does
not compromise your basic objectives.
not compromise your basic objectives.

7. What does Contract contain?
What does Contract contain?
 Agreed performance amongst Parties
Agreed performance amongst Parties
 Agreed methods and manners of
Agreed methods and manners of
measuring/determining the performance
measuring/determining the performance
parameters
parameters
 Detailed procedures to be followed for each
Detailed procedures to be followed for each
perfomance
perfomance
 Consequences of failures to achieve
Consequences of failures to achieve
performance
performance
 Detailed procedures to be followed for seeking
Detailed procedures to be followed for seeking
remedies against failures of performance
remedies against failures of performance

8. Typical Gas Contract Heads
Typical Gas Contract Heads
 Preamble
Preamble
 Definitions
Definitions
 Sale and Purchase
Sale and Purchase
 Term
Term
 Commissioning and initial supply date
Commissioning and initial supply date
 Conditions precedent
Conditions precedent
 Facilities description and maintenance
Facilities description and maintenance
 Quantity
Quantity
 Annual programme and Nomination procedure
Annual programme and Nomination procedure
 Delivery pressure, temperature
Delivery pressure, temperature
 Quality
Quality
 Measurement procedures
Measurement procedures

9. Typical Gas Contracts Heads
Typical Gas Contracts Heads
 Price
Price
 Billing and payments
Billing and payments
 ‘
‘Take or pay’ provisions and LDs
Take or pay’ provisions and LDs
 Dispute resolution mechanism
Dispute resolution mechanism
 Force Majure
Force Majure
 Warranties and indemnities
Warranties and indemnities
 Termination
Termination
 Assignment
Assignment
 Miscellaneous
Miscellaneous

10. Preamble
Preamble
 Describes Parties and their legal status,
Describes Parties and their legal status,
registered office etc.
registered office etc.
 Gives date of signing
Gives date of signing
 Describes the background and each
Describes the background and each
Party’s intent with which this contract has
Party’s intent with which this contract has
been developed
been developed

11. Definitions
Definitions
 Defines various terms and meaning thereof specifically
Defines various terms and meaning thereof specifically
for the Contract interpretation
for the Contract interpretation
 Whenever a defined term under definition is used with
Whenever a defined term under definition is used with
capital letters in the text of the contract it is to be
capital letters in the text of the contract it is to be
interpreted as per the definition
interpreted as per the definition
 Hence it is a very important section though it appears to
Hence it is a very important section though it appears to
be very simple
be very simple
 Definitions are generally brushed up by the Lawyers
Definitions are generally brushed up by the Lawyers
after the Contract draft has been prepared
after the Contract draft has been prepared
 Some of the important definitions are Delivery related eg.
Some of the important definitions are Delivery related eg.
Delivery Point, period, rate etc. Others could be Day,
Delivery Point, period, rate etc. Others could be Day,
Month, Year, Certain defined periods (say Recovery
Month, Year, Certain defined periods (say Recovery
Period, Cure Period etc.), related Quantities, Due dates,
Period, Cure Period etc.), related Quantities, Due dates,
Effective Date, Buyer’s/Seller’s Facilities,
Effective Date, Buyer’s/Seller’s Facilities,
Specification/Off spec. gas
Specification/Off spec. gas
 Manner of interpretation
Manner of interpretation

12. Sale and Purchase
Sale and Purchase
 Seller agrees to sell and Buyer agrees to
Seller agrees to sell and Buyer agrees to
buy and pay for Gas as per terms of
buy and pay for Gas as per terms of
Contract
Contract
 Talks about transfer of risk and title to gas
Talks about transfer of risk and title to gas
at Delivery Point
at Delivery Point

13. Term
Term
 Defines duration for which Contract is valid
Defines duration for which Contract is valid
from Effective Date
from Effective Date
 Provisions for extension of Term based on
Provisions for extension of Term based on
certain agreed procedure and, normally,
certain agreed procedure and, normally,
mutual agreement to do so.
mutual agreement to do so.
 Certain automatic extensions in case of
Certain automatic extensions in case of
certain Recovery Period related
certain Recovery Period related
obligations
obligations

14. Commissioning and initial supply
Commissioning and initial supply
date
date
 Normally a Target Date is set for initial supplies or a
Normally a Target Date is set for initial supplies or a
window of commencing supplies, after a defined period
window of commencing supplies, after a defined period
from Effective Date, is agreed upon
from Effective Date, is agreed upon
 Parties agree to take various steps to implement their
Parties agree to take various steps to implement their
respective facilities and keep each other informed
respective facilities and keep each other informed
 Based on the progress in implementation Parties may
Based on the progress in implementation Parties may
agree to decide exact date of initial supplies in the
agree to decide exact date of initial supplies in the
agreed window
agreed window
 There would be agreed process of communication and
There would be agreed process of communication and
Parties would agree to certain testing and commissioning
Parties would agree to certain testing and commissioning
process
process
 Consequences of any party failing to implement in time
Consequences of any party failing to implement in time
would be specified
would be specified

15. Conditions precedent
Conditions precedent
 Parties agree to achieve certain milestones
Parties agree to achieve certain milestones
before the Contract becomes effective.
before the Contract becomes effective.
 All parties list events/milestones
All parties list events/milestones
 Parties agreed on a procedure to inform each
Parties agreed on a procedure to inform each
other about achieving milestones
other about achieving milestones
 Parties may also agree to have right to waive the
Parties may also agree to have right to waive the
requirement of fulfilling milestones for agreement
requirement of fulfilling milestones for agreement
to be effective
to be effective
 If these conditions are not fulfilled in certain
If these conditions are not fulfilled in certain
agreed time period, there may be provision for
agreed time period, there may be provision for
Terminating the Contract
Terminating the Contract

16. Facilities description and
Facilities description and
maintenance
maintenance
 Facilities required to be created by all parties are
Facilities required to be created by all parties are
specified
specified
 Interphases in facilities for achieving specified
Interphases in facilities for achieving specified
performances are clearly specified
performances are clearly specified
 Obligation to follow reasonable and prudent practices in
Obligation to follow reasonable and prudent practices in
operations and maintenance
operations and maintenance
 Obligation to provide access for inspection
Obligation to provide access for inspection
 Specifying planned maintenance requirements and
Specifying planned maintenance requirements and
period thereof (e.g. dry docking of ship, statutory
period thereof (e.g. dry docking of ship, statutory
inspections, preventive maintenance). If there are
inspections, preventive maintenance). If there are
multiple trains there may be reduced buy/sell quantities.
multiple trains there may be reduced buy/sell quantities.
 Specify procedure for deciding planned maintenance
Specify procedure for deciding planned maintenance
period and obligation to make efforts to coincide planned
period and obligation to make efforts to coincide planned
maintenance of all parties
maintenance of all parties
 Provisions for unplanned and emergency shut downs
Provisions for unplanned and emergency shut downs
and consequences thereof
and consequences thereof