Liquefied Natural Gas: The Law and Business of LNG

Liquefied Natural Gas: The Law and Business of LNG

by Paul Griffin (Editor)

Hardcover(3rd Edition)

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Overview

This practical title has been updated and features contributions from leading oil and gas companies, consultancies and law firms by writers who are specialists in their fields. The content spans the latest developments in traditional LNG matters such as structuring projects, sale and purchase agreements and shipping, as well as emerging business such as LNG from coal seam gas and shale and the forced reopening of contract terms. Together, the contributors provide a rare guide to the legal, regulatory, political and practical elements of today's LNG business.

Product Details

ISBN-13: 9781911078128
Publisher: Globe Law And Business
Publication date: 10/30/2017
Edition description: 3rd Edition
Pages: 270
Product dimensions: 6.32(w) x 9.52(h) x 1.31(d)

About the Author

Paul Griffin (www.paulgriffinstories.com) lives, trains dogs, and writes in New York City.

Read an Excerpt

CHAPTER 1

LNG shipping

David Gardner Michelet & Co Ltd

1.1 Introduction

The history of LNG shipping

The first commercial liquefied natural gas (LNG) carrier delivered into service was the Methane Pioneer, which was converted in 1959 from an existing cargo vessel, with the first commercial cargoes delivered in the mid-1960s. The design of the cargo containment system is a particular issue for LNG transportation as normal steel cannot withstand the extremely low temperatures at which LNG is transported, and the Methane Pioneer had rectangular cargo tanks made of a special aluminium and internal holds fitted with balsa wood faced with maple and oak plywood to provide insulation. The vessel was built to transport LNG from Lake Charles, Louisiana to Canvey Island, United Kingdom and was partially owned by the British Gas Council, the forerunner of British Gas. The Methane Pioneer was followed in 1962 by the Methane Princess and the Methane Progress, both of which were built by the Vickers Yard in the United Kingdom with tanks of a prismatic design.

The next generation of LNG carriers were built in the 1980s and were required primarily to service new LNG projects in Abu Dhabi, Indonesia and Australia, transporting the gas to the emerging markets of Japan and, to a lesser extent, Korea and Taiwan. By 1990 there were approximately 70 LNG tankers in service, and until the mid-1990s the industry remained essentially a point-to-point trade with the great majority of employed vessels dedicated to specific projects and trades.

During this period, LNG shipping was a sleepy backwater of the shipping industry as a whole. The LNG carriers employed were generally small vessels with a cargo capacity of between 120,000 metres (m) and 145,000m, used steam turbine propulsion and predominantly the spherical moss membrane containment system. These vessels were either owned by or let on long-term charter to the projects to which they were dedicated. There were very few independent ship owners offering vessels for charter and the spot charter market was small and often non-existent.

1.2 LNG shipping in the twenty first century

The wider changes in the LNG industry from the late 1990s and during the first decade of this century spurred dramatic changes to the LNG shipping industry. These included a series of technical innovations intended to reduce the cost of LNG transportation and to bring the technology employed in the LNG shipping industry into line with other sectors of the maritime industry. In addition, at the end of the 1990s the entry into the international market of the Korean shipyards, and their aggressive pricing, aided by the fall in the value of the Korean won against the US dollar, drove down shipyard prices from around $250 million in the mid-1990s to around $160 million by the end of that decade.

At the beginning of this century there was also a huge increase in demand for new LNG carriers driven both by the LNG export projects and by the large energy companies seeking a portfolio of ships to enable them to trade LNG worldwide. Much of this tonnage was obtained on long-term charter facilitating the entry into the LNG shipping market of a new generation of LNG ship owners, frequently drawn from the oil tanker owners seeking opportunities to diversify.

At the same time the export projects and energy companies (together with the ship owners) sought to modernise the technology employed in LNG shipping to reduce the costs of this further. The first decade of the twenty first century saw a significant increase in the size of the LNG carriers ordered, most obviously with the Q-Flex and Q-Max vessels with cargo capacities of 215,000 cubic metres (m) and 240,000m respectively ordered for the Rasgas and Qatargas projects, but also more generally with a growth in the average cargo capacity of vessels ordered for other projects and for general trading. The overwhelming majority of the LNG carriers on order today have a cargo capacity in the order of 170,000m.

The same period also saw improvements in the propulsion systems employed by LNG carriers. Before the start of this century, almost all LNG tankers operated with steam turbine propulsion. Although reliable and with low maintenance costs, steam turbine vessels have relatively poor fuel consumption and had been discarded by most other shipping sectors, making it increasingly difficult to find engineers experienced in their operation and maintenance. However, the design changes to the vessels needed to accommodate the increased cargo capacity and, in particular, the widening of the aft body hull form led to a re-examination of the propulsion systems, and the use of twin shaft lines in order to maintain efficiency.

From 2001 onwards the industry began to move to the use of other forms of propulsion, particularly dual fuel diesel electric systems that are capable of burning both diesel oil and boil off gas, and more lately with the introduction of tri-fuel diesel electric vessels able to burn heavy fuel oil, diesel oil and boil off gas, and M type electronically controlled gas injection engines (ME-GI engines) that utilise high- pressure slow-speed gas-injection engines. In conjunction there have also been improvements in the performance of traditional steam turbine propulsion systems with the introduction of steam reheat engines which reduce the boil off rate of the LNG on board.

The advent of vessels built in Korea also saw a change in the form of containment system employed and extensive improvements to this system. Prior to 2000, the great majority of LNG carriers employed the spherical Moss containment system. Today, around three quarters of the world fleet employ one of the membrane containment systems. This change and accompanying improvements to the designs of these systems have led to a significant reduction in the rate of boil off achieved by the newer vessels below the generally accepted and warranted benchmark of 0.15% of cargo capacity per day.

1.3 The position today

Today the LNG shipping industry, although still small by comparison with the oil market, is a sophisticated, yet still in some respects an unusual, sector of the shipping industry.

At the beginning of 2015, there were 373 LNG tankers in service with a cargo capacity in excess of 30,000m and a further 155 tankers on order. This fleet completed more than 4,000 voyages during 2014, trading 214 tonnes of LNG on a genuinely worldwide basis. The majority of this fleet are let on charters of four years or more, and approximately 75% of those on order have already obtained charter contracts of one year or longer. The fleet is young with around two thirds of the fleet delivered within the last 10 years, and relatively few vessels scrapped each year.

The LNG shipping market remains for the large part divided between the fleets controlled by specific projects and those controlled by the large gas companies that use their portfolio of vessels to trade worldwide. The role of the independent shipowner is increasing but remains relatively small. Second-hand sales and scrappings are rare, and only a limited number of LNG carriers trade spot for any prolonged period of time. This however is changing as new buyers, sellers and traders enter the market generating a demand for vessels on shorter-term charter.

The growth of the LNG shipping industry has been marked by volatile charter rates as the newbuildings ordered during periods of optimism as to the prospects of the industry have been delivered in cycles. The wave of newbuildings ordered in late 2012 and 2013, in conjunction with the delays to the start up or new projects, drove down charter rates, a process that continued for much of 2015. The LNG spot market is also tiered with the newer and more cost-efficient vessels generally commanding a premium over the older vessels.

Side by side with the growth of the world LNG has been the development of floating LNG (ie, the use of LNG carriers as permanently moored regasification facilities) and the prospect of using LNG carriers as permanently moored liquefaction facilities. Here the premium commanded by the newer and more fuel-efficient LNG carriers has generated a supply of older vessels for conversion into floating storage and regasification vessels (FSRUs), and these can offer lower-cost import terminals on relatively short delivery. In addition, the market is developing for the supply of newbuilding FSRUs and floating production storage and liquefaction units (LNG FPSOs), and both of these developments have driven the adoption of ship-to-ship transfer techniques for LNG.

There is also increasing demand for 'small' LNG carriers typically with a cargo capacity of 90,000m or less. These vessels are often used to load or deliver LNG to small-scale liquefaction or power plants situated on inland rivers or other locations inaccessible to the larger trading tankers. Finally the use of LNG as fuel is gaining momentum. Although the LNG shipping industry has always used LNG boil off as fuel, LNG is potentially available to all trading vessels as an environmentally clean and efficient means of propulsion. The configuration of existing ship engines and the difficulties in obtaining access to LNG bunkering are certainly obstacles but as of 1 January 2016 there were 70 vessels in service powered by LNG that are not LNG carriers.

From a contractual perspective the LNG shipping industry remains conservative. Long-term charter are predominant; there is only one standard form LNG time charter in widespread use, the ShellLNGTime 1 form, and both voyage charters and contracts of affreightment remain rare. As a sign of the pace of change, the industry does however have its first pool of LNG carriers, the Cool Pool, which commenced trading in September 2015.

2. The acquisition of LNG ships

The seller or buyer of LNG under a long- or medium-term sale and purchase agreement can acquire the use of a LNG carrier in two ways: by purchasing and owning the vessel, or by chartering it under a time, voyage or bareboat charter or other contract of affreightment.

2.1 Owning LNG carriers

Some buyers and sellers, principally the export projects and some of the gas majors, do choose to own LNG carriers, and there are certain advantages to ownership. The cost of financing for a large project or gas company can enable that company to obtain the vessels at a competitive cost, with the opportunity to realise the potential of the residual value in the vessel at the end of the typical long-term charter period. Ownership will also permit the greatest degree of flexibility in the operation of the vessel so that day-to-day disputes over the maintenance of the vessel can be avoided and the possibility of conversion to an alternative use can be easily explored.

There are however also disadvantages to ownership, principally the levels of technical and operational support that are required and the potentially enhanced liabilities that accompany ownership in the event the vessel is involved in a collision or spill.

The mechanisms of ownership are relatively straightforward. Every ship sailing in international waters must be registered with, and fly the flag of, an individual state. A ship that does not possess this 'nationality' enjoys no protection under international law and will be unable to enter ports or engage in lawful trade. By and large, all nations are free to determine the conditions that a shipowner must satisfy before it is entitled to register its ship on that country's registry and/or to fly the flag of that country, and shipowners are usually free to choose the flag of the vessel.

Generally, flag states fall into one of two groups: the onshore flag states and the offshore 'flags of convenience'. Most onshore European flags have traditionally been more expensive for the owner than offshore flags, and this has led to a steady move away from the onshore flags in favour of offshore jurisdictions. In recent years, however, many European ship registries have adopted tonnage tax regimes in order to compete and retain their commercial shipping fleets, with some success. When this can be combined with tax leasing structures, it can be very attractive to owners of high-value ships such as LNG carriers.

Otherwise the principal issues to consider are the cost, technical and other requirements of the flag state and the reputation and acceptability of the flag state. The costs of registration and operation do vary from flag state to flag state: some flags require foreign companies to register in the flag state as a foreign maritime entity; the crewing and technical requirements vary from state to state; some flags will not be acceptable to the vessel's mortgagees, particularly where a lower priority is given to the mortgage by comparison with other creditor claims; and some flags are not regarded as sufficiently blue chip for the LNG industry.

2.2 The sale and purchase of LNG tankers

(a) Generally

As with vessels in other sectors of the shipping industry, LNG carriers can be acquired second hand or direct from a construction yard as newbuilding tankers. Second-hand vessels are usually bought and sold on terms based on the Norwegian Sale Form 1989, 1993 or 2012 forms, although in practice the sale of second-hand LNG vessels remains exceptional.

The prospective owner looking to acquire an LNG carrier will therefore generally approach one of the leading shipyards in the Far East to seek to agree terms and timing for the delivery of a newbuilding. The principal construction yards are now located in South Korea - particularly at the facilities of Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Hyundai Heavy Industries - and to a lesser extent in Japan, with the leading Chinese yards also attracting increasing orders often for projects linked to the import of LNG into mainland China.

(b) The shipbuilding contract

There is no standard form shipbuilding contract for LNG carriers and, as in the tanker and dry cargo sectors, the form of shipbuilding contract concluded with a Korean, Chinese or Japanese yard will generally be based (albeit sometimes loosely) on the standard form contract prepared by the Shipbuilders Association of Japan (the SAJ form).

In the LNG industry, however, the trend this century has been for the charterer to negotiate and agree the terms of the shipbuilding contract and technical specification directly with the shipyards, and then to issue a formal call for tender to shipowners seeking offers for the long-term charter of these 'project' ships and sometimes any competing vessels the shipowners have on order or already 'on the water'. Direct negotiations with the shipyard enable the charterer to select a vessel of the size, propulsion system and other features that permit the most economic transportation of the volumes of LNG the charterer (or its affiliate) has agreed to sell or purchase. Direct negotiations also have the benefit of enabling the charterer to reserve delivery slots at the shipyard that most nearly match the anticipated project requirements, although in latter years this has been a less pressing concern.

These direct negotiations have also led to a degree of departure from the standard forms and variance in the form and terms agreed in LNG shipbuilding contracts.

Design: Generally, the shipyards have been willing to develop and adapt their own 'in-house' designs to accommodate the changing requirements of owners and charterers over the last decade, and yet to retain contractual responsibility for this design. This assumption of contractual responsibility will usually extend even to the more complex features of the vessel, including the propulsion and cargo containment systems, and sometimes to specific innovations such as the re- liquefaction plant. Generally, the builder will retain title to the vessel during construction and until delivery, with the consequence that the rights of the buyer (and charterer), in the event that the builder defaults, will usually be limited to the rights to terminate the shipbuilding contract and to require the builder to refund any instalments of the contract price paid by the buyer prior to this termination.

Contract price and delivery: Even where the dock and berth space required to construct an LNG carrier is booked several years in advance, LNG shipbuilding contracts are almost invariably concluded on a fixed-price basis, with the contract price calculated in US dollars and payable in instalments before and on delivery of the vessel. Although the price is fixed, it will be capable of adjustment to reflect any modifications required by the buyer and sometimes by the charterer. The proportion of the price payable before delivery will depend in part on the respective bargaining positions of the buyer and builder, but also on the choice of shipyard, with some builders more willing than others to agree flexible terms.

(Continues…)



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Table of Contents

Foreword, 5,
LNG shipping, 7,
Upstream challenges facing joint venture participants, 29,
LNG regulation, 51,
Principles of price reviews and hardship clauses in long-term gas contracts, 89,
Shale gas for LNG, 133,
Structuring LNG projects: Evolution or revolution in the LNG supply value chain?, 151,
Floating LNG, 169,
LNG sale and purchase agreements, 185,
Obligations and failures to deliver or take under long-term LNG sale and purchase agreements, 213,
Price reviews in practice, 259,
LNG trading, 275,
LNG master sale and purchase agreements, 287,
LNG - a minefield for disputes?, 305,
Portfolio LNG - the new normal (sort of), 321,
New markets for LNG, 341,
Financing LNG projects, 357,
Financing US LNG projects, 395,
Export credit agencies, 421,
US LNG and the global market, 435,
About the authors, 451,

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