James English, senior counsel in Clark Hill's Houston office.

The liquefied natural gas (LNG) boom in the United States, Australia and Qatar has ushered in a new era of short-term supply deals for the natural gas industry. The International Group of LNG Importers (GIIGNL) has reported that 30 percent of LNG purchases are now considered short- term. In response to this boom in short-term LNG trading, several industry participants have published model forms to facilitate deals. Four of those models, which are normally referred to as Master Sale and Purchase Agreements, have been especially influential. They include a model published by GIIGNL; Trafigura, a large Singaporean trading house; BP, a major oil company; and AIPN, an organization of international negotiators. Each model has its strengths and weakness that a practitioner should consider.

Trading Entity and Structuring

The traditional structure of a producer selling LNG to power generation buyers on a long-term basis is no longer the only viable business model for commercialization. Instead, aggregators have started accumulating worldwide portfolios of LNG supply that is ready for sale to any profitable market, needing only a transaction confirmation to make the deal effective. It follows, therefore, that a practitioner should first consider which model best suits the character of a company's likely flow of LNG. For maximum flexibility, the BP model allows any affiliate of the parties to confirm a transaction. Slightly less flexible, the bidirectional GIIGNL model facilitates sales by either party but not all affiliates. Both models account for a dynamic market where LNG might change hands several times before reaching its final destination. For increased trading speed, the Trafigura model allows transaction confirmations that are signed or unsigned. Such an approach has been used in the domestic gas industry for decades and speeds up the process of product changing hands.

Credit Support

With large volumes of LNG being traded between companies of varying creditworthiness, the ability to provide financial support for a confirmed purchase is essential. The approach to credit support varies widely across the models. In the BP model, credit support is triggered by a seller's "reasonable concerns" of the purchasing parties' creditworthiness. The party asked to provide support may provide a parent guarantee or letter of credit. While this approach has merit, the phrase "reasonable concerns" is not clearly defined and similar language in domestic gas sales agreements has been criticized for its vagueness. Practitioners should take this approach as a near unlimited right to request credit support.

On the opposite side of the spectrum, the GIIGNL model requires credit support if the Buyer has a credit rating lower than BBB+. The buyer may be asked to provide a parent guarantee or letter of credit. For well-capitalized buyers, this language effectively amounts to no meaningful credit support. This could pose a significant risk where a buyer's credit rating is rarely adjusted, or the buyer has a history of nonpayment or delayed payment despite their strong financial standing.

This negotiation occurs on a case-by-case basis. For this reason, selection of the Trafigura or AIPN model might make sense as it defers this issue to the transaction confirmation.

Payment Disputes

Payment disputes can also impact a company's ability to collect on its expected revenue. In the Trafigura and BP models, the payment dispute provision requires payment of any disputed amount before resolution. In the GIIGNL model, the payment disputes provision allows the disputed amount to be held back until the dispute is resolved. In the AIPN model, the parties have the option to choose either approach. This simple issue of "who holds the cash" can be very important. Some buyers, for instance, use payment dispute provisions as an interest-free 30-day financing method and, therefore, make counterparty vetting a necessity before agreeing on this provision. Insolvency risk also comes into play because disputed payments may be subject to discharge, depending on the governing law selected.

Corruption & Sanctions

Anti-bribery, corruption (ABC) and sanctions provisions are often hotly debated, and each agreement presents them in different ways. The Trafigura and GIIGNL models both fall short on specificity, trying to capture prohibited activities by using descriptive language and omitting any reference to the underlying statutes. Conversely, the AIPN and BP models specifically reference the Foreign Corrupt Practices Act 1977 and the Bribery Act 2010 of the United Kingdom, and they generally present the clause in a more targeted manner. Also, of note in the GIIGNL model is the lack of an explicit right to terminate the contract if an ABC event occurs. While a party could argue that a breach has occurred by noncompliance with laws, without an explicit right to terminate, a dispute seems more likely.

Concerning sanctions, the only agreement that falls short is the GIIGNL agreement, which omits sanctions language completely. This omission would discourage many companies from using the form, and for that reason, the other three models are stronger in this area. Desirable options include the ability to divert the LNG cargo, withhold payments, or terminate the transaction if not resolved.

Off-Specification Natural Gas

Finally, each agreement treats off-specification LNG differently. Off specification LNG is LNG that does not meet pre-negotiated quality standards. LNG quality is important because a power plant can be damaged or run inefficiently if off-specification gas is used. The solution is a fee because, in most cases, a facility can blend or treat the gas to bring the gas into the acceptable quality range, though not without incurring a material cost.

The Trafigura and BP models handle this by imposing a fee cap of 25 percent. This approach may be best suited for buyers who can predict the likely cost of treatment. The GIIGNL model imposes a more novel approach by asking the buyer to present estimated treating costs, leaving the seller with the choice to accept or not accept the fee. This approach can be more precise, but may be undesirable for the seller as it may invite a higher cap. The AIPN model has similar optionality, providing a right to notice good faith losses, actual losses incurred, or a negotiable cap.

James F. English is a senior counsel in Clark Hill Strasburger's Corporate Law practice in the firm's Houston office, specializing in oil & gas industry commercial transactions, infrastructure projects, and acquisitions.