Download Take or Pay Gas Sales and Gas Pricing Disputes

1ST ICC AFRICA REGIONAL ARBITRATION
CONFERENCE, LAGOS. NIGERIA.
PARALLEL SESSION ON ENERGY DISPUTES
Take or Pay Gas Sales and Gas Pricing Disputes
Lekan Ogunleye
21st June, 2016
Take or Pay “ToP” & Gas Sale Agreements
 Background to ToP in Gas Contracts: Gas production is capital
intensive with longer cost recovery period. Consequently, there is
need for security of revenue stream to the Gas producer;
 Concept of ToP: ToP has emerged as a contract performance
incentive mechanism widely used in Gas Sale Contracts.;
 Key Benefits of ToP: Bankability - A major enabler for the
development of new Gas Projects including Gas delivery
infrastructure especially in developing markets. Balances risksproducer bears production risk & the purchaser bears the risk of
market demand;
 Take or Pay & Deliver or Pay “DoP”: DoP likewise incentivizes the
performance of the Seller’s obligation .
Take or Pay in Gas Sales Contracts- Other
Issues for Consideration
 ToP Calculation: The TOP threshold is usually set as a percentage of the
ACQ after netting off Seller’s non-delivery quantities, off-spec Gas and
quantities not delivered due to FM or Allowed Mtce.;
 Make Up Rights: If Purchaser has paid for any ToP quantity, then, in the
same or subsequent Contract Year(s), it is entitled to take delivery of an
equivalent quantity of Gas (“Make Up” Gas) generally without additional
payment subject to certain pre-negotiated terms ;
 Carry Forward Rights : the right to transfer the volume taken above the
contracted quantity in a given period to the next periods in order to
mitigate any potential ToP exposure;
 ToP Liability Vs Relaxed & Flexible transactional culture: The magnitude of
the ToP obligation & potential loss of Make Up rights could instigate
contractual disputes.
Gas Pricing Approach in Nigeria
 Key Characteristic: The Nig. domestic Gas sector prices are still significantly
Govt. regulated due to its fledging state & illiquidity, though “willing buyerwilling seller” deals are increasing ;
 General Gas Pricing Approach: US dollar linked- sector based pricing; Gas
Based Industries, Power, Commercial ( includes offtakers from the
transmission system such as most cement plants and Industries supplied
through the distribution system and whose price is inclusive of distribution
tariff) ;
 Role of the Gas Aggregator: current structure prescribes the existence of a
Gas aggregator- GACN (To determine an aggregate price based on the
volume offtake and price for each sector);
 Other Pricing Options: Netback pricing, Indexation of Gas price to the price
of competing fuels (e.g Crude Oil price linked pricing or Fuel Oil indexed
pricing) also prevalent;
 Annual Price Adjustment: The GSA contract price typically includes a price
escalation mechanism to adjust for inflation.
Examples of Typical Triggers for Gas
Pricing Disputes
 Price Review “PR”: Most long term contracts include PR clauses.
An effective PR clause should provide clarity on Trigger (e.g.
change in law, significant change in the Gas mkt.), Procedure &
Methodology;
 Annual Price Adjustment/Escalation: Gas contract prices are
usually adjusted annually to account for inflation etc. through an
OECD Consumer Price Index linked formula;
 Availability, Accessibility & Reliability of Data: differing views on
the price of competing fuels, reliability of market data, illiquidity ;
 Currency conversion Issues: disagreement on the applicable
US$/Naira conversion rate (e.g. the monthly average of the central
quotations for buying and selling US$ dollars as published by the
CBN for the preceding Contract Month).
Resolution of Take or Pay Gas Sales
and Gas Pricing Disputes
 Amicable Resolution: given the long term nature of Gas
contracts, counter parties more often than not directly
engage to devise practical solutions to contractual disputes;
 Expert Determination: Pricing & Gas offtake disputes are
better handled by Experts due to their technical nature and
general need for a speedy resolution. Often such issues are
expressly stated as “Expert Matters”;
 Arbitration: Most Gas contracts provide for referral of
disputes (other than Expert Matters) to arbitration; &,
 Others: Appeal of the Expert or Arbitral award to the Court;
Waiver of Rights etc.
Summation of Key Messages
 ToP terms are useful contract performance tools in Gas Sale Contracts
and major enabler for Gas asset development;
 The Profile & Good Standing of Prospective Counter party Key;
 Expert support for contract negotiation & documentation essential. E.g.
Pricing provisions should be clear and navigable;
 Effective Contract Risk Mitigation- to address consequences of Project
delays, Market developments, etc.;
 Need for realistic assessment of offtake requirements, market conditions
etc.;
 Avoidance of Improper use of leverage – imposition non-market prices
(excessively low or high prices) is a recipe for conflict;
 Communication, Data validation & Information flow are fundamental.
Thank You