Legal Structures and
Commercial Issues for LNG
Export Projects -North America & Beyond
Steven R. Miles
Baker Botts L.L.P.
January 15, 2013
New York, NY
© 2013
Presenter Introduction
 Recent LNG Deals:
▪ Developing greenfield LNG liquefaction projects:
▪
▪
▪
▪
Sabine Pass LNG
Peru LNG
Tangguh LNG
Brass LNG
Wheatstone LNG
Darwin LNG
Equatorial Guinea
Sakhalin II
Yamal LNG
Qatargas 3
Angola LNG
Pacific Rubiales
▪ Developing the first U.S. LNG export project in 40 years
▪ Securing the first LNG supply into new terminals in Brazil,
Chile, China, Dominican Republic, E.U., India, Indonesia,
Mexico, Puerto Pico, & U.S.
▪ Negotiating some $500 Billion in LNG sales agreements
▪ Chartering 73 LNG vessels (~20% of world fleet)
▪ Co-Chair of industry-wide effort for the recently completed
uniform LNG Master Sales Contract
2
Presenter Introduction
3
Focus and Overview of Key Topics
1. Common Project Structures in an LNG Export Project
 Integrated Upstream Model
 Merchant Model
 Tolling Model
2. Commercial Issues Associated with N.American LNG Projects
3. LNG Regulatory Regime
 FERC authorization
 DOE Export authorization
 Policy Issues
4. Final Remarks
4
Common Project Structures –
LNG Export Projects
5
Common Project Structures –
LNG Export Projects
 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
offtakers
• Tolling Model: LNG plant does not take title to natural gas
feedstock or LNG produced at the plant, but provides
liquefaction and processing services
6
Common Project Structures –
Integrated Upstream Model
Physical Assets
Ownership
Leases/
Licenses
Upstream Oil and Gas
Assets
Gas
Gas
Producers
LNG Liquefaction Plant,
Common Facilities, and
Loading Port
EPC Contracts
Joint
Marketing
Agreement
LNG
LNG Offtake
Joint
Operating
Agreement(s)
LNG
Buyers
LNG Sale and
Purchase
Agreement(s)
7
Common Project Structures –
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 financeability by reducing cross-default risk
 Each gas supplier may control its own marketing
 Risks:
 Requires identical ownership of upstream and downstream
assets (structuring with TrainCos can allow future trains with
separate ownership)
 Key Contracts: JOAs, PAA, LBA
 Example: Alaska Gasline
8
Common Project Structures –
Merchant Model
Physical Assets
Upstream Oil and Gas
Assets
Ownership
Gas
Producers
Lease/License/
JOA
Gas Sales
Agreement(s)
Gas
LNG Liquefaction Plant,
Common Facilities, and
Loading Port
Contracts
Project
Company
EPC Contract
LNG
LNG Offtake
LNG
Buyers
LNG Sale and
Purchase
Agreement(s)
9
Common Project Structures –
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
 Key Contracts: SPA, GSA
 Examples: Sabine Pass, Golden Pass, several BC projects
10
Common Project Structures –
Tolling Model
Physical Assets
Upstream Oil and Gas
Assets
Ownership
Gas
Producers
Tolling
Company
EPC Contracts
Liquefaction
Tolling
Agreement(s)
LNG
LNG Offtake
Leases/
Licenses
Joint Operating
Agreement(s)
Gas
LNG Liquefaction Plant,
Common Facilities, and
Loading Port
Contracts
LNG
Buyers
LNG Sale and
Purchase
Agreement(s)
11
Common Project Structures –
Tolling Model
 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
 Key Contracts: TSA, LBA
 Examples: Jordan Cove, Cameron, Freeport, Cove Point,
Lake Charles, Gulf Coast, Gulf LNG, Elba Island
12
Commercial Issues Associated with
N. American LNG Projects
13
Commercial Issues Associated with
N.American LNG Projects
 Development Funding - At risk
 Consideration?
 Equity
 Tolling discount
 Construction cost risk -- TSA signed before FID
 Who takes risk of cost escalation during development?
During construction? Is there risk sharing? Exit ramp?
 Greater issue for greenfields than for expansions
 Gas Supply
 Tollers must obtain gas (SPA buyers need not)
 Buy off grid, or dedicated source? (EPA issues?)
14
Commercial Issues Associated with
N.American LNG Projects (con't)
 Terminal Force Majeure risk
 Customer continues to pay toll/fixed charge?
 How long? Termination right?
 Change in law or tax risk
 TSA customers may bear this risk; SPA buyers rarely do
 Multi-users
 Inter-customer default/credit risk?
 Are partial assignments permitted?
 Pipeline
 Who owns the pipeline, is there capacity available, and will
an open season by required?
15
Commercial Issues Associated with
N.American LNG Projects
 Considerations upon Reconfiguring an LNG import Project
as a Bi-Directional Facility
 Need to navigate around existing regas customers -- literally
and figuratively
 Gas nominations, storage, and scheduling are more complex,
less flexible
 Effects on the associated pipeline to accommodate both
imports and exports
16
LNG Regulatory Regime
17
Regulatory Regime
 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 siting authority.
 Department of Energy ("DOE"): Approval for exports
of the commodity.
 Pipelines governed by Section 7 of the NGA.
 FERC: Regulation of pipelines.
18
Regulatory Regime
 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
19
Regulatory Regime
 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
20
Final Remarks
21
Final Remarks
 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
22
Final Remarks
Presented By:
Steven R. Miles
Head of LNG Practice
Baker Botts L.L.P.
1299 Pennsylvania Ave., NW
Washington, D.C. 20004-2400
+1 202.639.7951
steven.miles@bakerbotts.com
23