Formal agreements needed for best use of multi-shipper terminalJacob Dweck, Sutherland Asbill & BrennanThomas Warren, Sutherland Asbill & BrennanSteven Sparling, LNG Solutions Group

Unofficial accounts at the time said that BP Energy Co., Shell NA LNG Inc., and El Paso Merchant Energy LP took 2 years to negotiate a shippers’ protocol for their concurrent use of the Cove Point, Md., regasification terminal. (Statoil Natural Gas LLC has since taken El Paso’s share.) The protocol embraces critical marine, storage, inventory, operational, and other fac-tors potentially affecting efficient utilization of this multi-ship-per terminal.

The Cove Point protocol, 3 years after its reactivation, remains the only operating private model in the world that addresses multi-shipper issues. In the future, however, multi-shipper issues will have to be managed in many regas terminals on both sides of the Atlantic, as the LNG industry becomes ever more robust.

In the US, BG Group PLC and Shell will have to utilize their respective capacities as multi-shippers at the tariff-regulated Elba Island, Ga., terminal operated by Southern LNG Inc., an El Paso affiliate. Shippers at every newly constructed, “Hackberry” merchant terminal will confront intricate multi-shipper challenges, from Total SA, Chevron Corp., and Cheniere Energy Inc. at Sabine Pass, Tex., (developed by Cheniere and scheduled for 2008) to Eni SPA and Merrill Lynch Commodities at Cameron, La. (Sempra 2008).

The same is true for any shipper considering contracting for less than the entire capacity at any of the various terminal proposals that have progressed in the US regulatory permit-ting process.

Across Europe, the complex task of tackling multi-shipper regas issues falls on the shoulders of regulators seeking to pro-vide terminal access to several shippers in order to promote greater competition and access to gas supplies. Belgium’s Commission de Régulation de l’Electricité et du Gaz (CREG) has taken steps to develop a multi-shipper protocol for Zeebrugge, as the CREG aims to enhance meaningful third-party access and greater market liquidity at this important hub. More pro-nouncedly, the Spanish regulatory authority, the Comisión Nacional de la Energía (CNE), has adopted cross-terminal, multi-shipper rules for the LNG receiving facilities in Barcelona, Bilbao, Cartagena, Huelva, and Sagunto.

Whether at private merchant facilities or regulated terminals, the significant multi-shipper issues are essentially the same:• How should vessel arrival windows be allocated among the shippers and synchronized with programs at various liquefaction plants?• How should shippers deal with vessels of different sizes and requirements?• How should terminal storage capacity be shared and managed?• How should sendout be managed to achieve the maximum benefits for the shippers’ baseload and other needs?• How should the parties address shipments of varying gas compositions?

And so on.

There is no silver bullet, no single answer. Rather, the multi-shipper model and specific operational agreements must be carefully tailored for the physical characteristics of each termi-nal and to the requirements of each shipper. The measure of success in any scenario, however, is whether the regas termi-

®

Weaver’s Cove (Hess)

Pleasant Point (Quoddy Bay)

Downeast LNG (Kestrel)

Neptune (Tractebel)Existing terminal

Proposed tollingterminal

Proposed proprietaryterminal

Everett (Suez)

Crown Landing (BP)

Northeast Gateway(Excelerate)Sparrows Point (AES)

AES Ocean Express

Suez Calypso

Cove Point expansion(Dominion)

Cove Point(Dominion)

Broadwater(TransCanada/Shell)

Elba Island (El Paso)

Seafarer (El Paso)

Calypso Tractebel

Elba Island expansion (El Paso)

Existing, proposed US terminals: East Coast Fig. 1

z0607LNGspar01

Source: Sutherland Asbill & Brennan LLP, Washington

Existing, proposed European terminals Fig. 3

z0607LNGspar03

Source: Sutherland Asbill & Brennan LLP, Washington

CZECHREPUBLIC SLOVAKIA

GREECE

CYPRUS

NETH.

MACEDONIA

ALBANIA

MOLDOVA

LITHUANIA

MONTENEGRO

YUGOSLOVIABOSNIA

ANDHERZEGOVINA

AUSTRIA

CRETEMALTA

Operational

Under construction

Planned

Expansion proposed*

SARDENIA

CORSICA

AUSTRIA

ITALY

SPAIN

MOROCCO ALGERIA TUNISIA

GERMANY

FRANCE

PORTUGAL

HUNGARYROMANIA

BULGARIA

TURKEY

DENMARKSWEDEN

POLAND

BELARUS

UKRAINE

U. K.

Mediterranean Sea

AtlanticOcean

AegeanSea

BlackSea

English Channel

Sines Revithoussa

Ereglisi Botas

Bilbao

Montoir

PanigagliaFos-sur-Mer

Isle of Grain*

Le Verdon

Priolo

Vassiliko

Izmir

PGNiG

Eemshaven

Wilhelmshaven

Rotterdam

Zeebrugge*

Rovigo

Rosignano

Livorno

Fos XOM

Canvey IslandTeesside (Excelerate)

Teesside (ConocoPhillips)

Huelva* Cartagena*

Sagunto*

Barcelona*

Ferrol

Fos Cavaou

Brindisi

South Hook,Miflord Haven*

Dragon LNG

Reprinted with revisions to format, from the July 11, 2006 edition of LNG OBSERVERCopyright 2006 by PennWell Corporation

nal can be operated effectively and efficiently for the benefit of all shippers.

When all is said here, we seek to drive home one key point: The multi-shipper environment poses highly complex marine and operational coordination issues that must be studied early and carefully by each shipper considering a contract for terminal capacity—and effective agreements must be reached among the shippers to achieve efficient operations among them at all levels. Ignoring this message could prove very costly.

The multi-shipper agreement is in its infancy, while the LNG terminal use agreement (TUA) and LNG sales and purchase agreement (SPA) are more developed. For lack of a commonly recognized industry name, we take the liberty of calling it the shippers’ “terminal sharing agreement” (TSA). Evolving roleAs late as the 1990s, the multi-shipper protocol for regas terminals was not part of the industry lexicon; there was no need for it. Its closest cousins were the strict vessel scheduling programs adopted upstream by LNG producers to maximize deliveries to buyers at liquefaction plants under long-term, take-or-pay agreements.

But the emergence of the new global LNG market during this decade, particularly in the Atlantic Basin, has brought into sharp relief the need for shippers—the LNG buyers—to reach agreements regarding their concurrent use of any particular receiving terminal.

When the regas terminal is operated by or for a single ship-per, all of the required coordination is in one shop. This real-ity has prevailed for decades in the Asia-Pacific region where large utilities in Japan and Korea have contracted for the vast majority of the world’s LNG production to be delivered to their proprietary regas terminals.

In the US Atlantic and gulf coasts, proprietary owners of

existing or new terminals do not confront multi-shippers issues unless they decide to share capacity with third par-

ties, which none has offered as of now.

The Everett, Mass., facility has been operated solely by and for Distrigas of Massachusetts LLC, subsidiary of Suez LNG NA, since the 1970s. Recent terminal proposals by LNG majors similarly have been made on a proprietary, no-sharing premise, such as BP PLC’s Crown Landing project in Logan Township, NJ, on the Delaware River, or Golden Pass, the most advanced of ExxonMobil Corp.’s Gulf of Mexico propos-als, in Sabine Pass, Tex., or Compass Port, ConocoPhillips’ platform off Alabama.

For these and other developers of proprietary terminals, the

costs of a regas facility are absorbed as part of the LNG value chain, even if the facility is expected to be underutilized.

Apart from the proprietary model, however, powerful eco-nomic and regulatory forces point to the increasing, perhaps ultimately prevailing use of multi-shipper terminals on both shores of the Atlantic and around the Mediterranean. In North America, the urgent need for significant LNG imports has fueled entrepreneurial independent companies, acting early to capture premier sites and develop them effectively.

Here Cheniere is the poster child, with its Sabine Pass termi-nal in Cameron Parish, La., scheduled to begin operations in 2008, and three other sites approved or well advanced in the federal permitting process.

For independent developers, merchant terminal econom-ics are based on contracting out firm capacity, if necessary to multiple users. Chevron and Total each contracted for 1 bcfd of sendout capacity at Sabine Pass, while Cheniere has retained 0.6 bcfd for use by one of its affiliates. Other independent ter-minal developers have the same incentives, such as Calhoun LNG, Gulf LNG Energy, NorthernStar, Sempra, and TORP.

The direction toward multi-shipper terminals also has been enhanced by new regulatory regimes. In Europe, it has been the Second EU Gas Directive (2003) to require member nations to adopt third-party access rules for LNG receiving terminals.

In the US, it has been the policy of freeing new facilities from rate and access tariff-based regulations, under the so-called Hackberry policy adopted by the US Federal Energy Regulatory Commission in 2002 and made law in 2005 as part of the Energy Policy Act.

The evolution of a more liquid LNG market also has pushed the multi-user terminal to the forefront. Globalization and greater vessel destination flexibility have offered shippers the opportunity of diverting LNG cargoes to the higher priced market, as witnessed in the summer of 2005 when several Trinidadian shipments sailed to Spain instead of their intended

destination of the US Gulf Coast. There are many other exam-ples, of course.

To exploit this price arbitrage fully, however, the LNG shipper would need access at a merchant terminal at the higher-priced market (instead of having to sell the LNG to an access holder at the receiving terminal). For some of the larger LNG players as BG and Suez (soon in combination with Gaz de France), arbi-trage and diversion opportunities have translated into a strat-egy of building a portfolio of receiving-terminal rights. Because it may be too costly or inefficient for such players to own the entire capacity at each terminal that they plan to employ, par-tial capacity at a multi-shipper, merchant terminal offers a more economic alternative.

To make the most of the multi-user regas terminals, however, shippers must seek to overcome the attendant disadvantages of sharing berthing windows, storage, and other terminal ser-vices. This provides a strong incentive to enter into a TSA with the other shippers. Vessel unloading windows“The LNG trade is essentially about marine movements,” explained a conference speaker recently, adding that “LNG should be viewed from the sea.”

With this recognition, perhaps the most significant issue for a multi-shipper terminal is the allocation of unloading windows among shippers, including the initial assignment and any sub-sequent modification. This issue is particularly acute because upstream arrangements, whether sale and purchase agree-ments or production sharing agreements, often impose inflex-ible lifting schedules with the notion that the regas terminal will be available essentially on demand.

On the receiving end, however, the terminal operator likely will

adopt procedures for establishing and adjusting the schedule of unloading windows without regard to any upstream plans. The terminal operator’s primary interest is to satisfy its contrac-tual service obligations, not optimize window availability for the shippers. Once the schedule of unloading windows is set, the terminal is committed to protecting its shippers’ firm rights to the unloading windows.

On the flip side, the terminal operator’s procedures may be

ambiguous and subject to change by the terminal under spe-cific circumstances. This may be of urgent concern if one of the shippers is an affiliate of the operator.

Even if the window allocation procedures are well defined and nondiscriminatory, scheduling conflicts between the shippers are inevitable. Moreover, even the best schedules invariably are disrupted by the vagaries of shipping—mechanical difficulties, foul weather, difficulties with governmental authorities, and late tugs—and of the terminal’s operations.

In the absence of a TSA, all such scheduling conflicts could become subject to arbitrary, operator-driven tie-breaking pro-

cedures. With the TSA, shippers can take charge of the ship-ping schedule at the regas terminal and make accommoda-tions for each other.

While the terminal operator must ultimately approve the

schedule and any modifications to it, the TSA offers a prepack-aged solution to terminal rules and procedures that otherwise may be unclear, ambiguous, or discriminatory. The shippers’ coordination embodied in the TSA seeks to eliminate the need ever to apply the terminal’s rules and procedures.

The TSA also offers shippers the ability to agree to change or trade unloading windows, as necessary to reflect ship-ping and terminal realities as well as market opportunities such as spot cargoes. The net result of such coordination is a schedule of unloading windows that works in practice, not just on paper.

Storage, sendout Depending on the volume of its storage capacity rights at the regas terminal, a shipper may not even have sufficient stor-age capacity rights fully to discharge an LNG carrier. Indeed, as substantial numbers of supersized LNG carriers enter the world fleet, such as the Q-flex (about 216,000 cu m) and Q-max (about 250,000 cu m) ships, inadequate storage capacity becomes more likely.

For these storage-capacity-constrained shippers, a TSA that provides for actively sharing storage capacity rights would be mandatory. Shippers with storage capacity rights sufficient to discharge a target fleet of LNG carriers also benefit significantly from sharing.

First, sharing storage would eliminate the marketing risks attendant to having to essentially empty the shipper’s stor-age capacity to make room for the shipper’s next LNG car-rier, which could be delayed. From this perspective, sharing is a risk-management tool during evaluation of baseload sales commitments. Second, it would allow a shipper to exceed its permitted storage volume without incurring storage overrun charges at the regas terminal.

It is important to note that any TSA regime for sharing stor-age capacity is inextricably intertwined with the scheduling of unloading windows as well as sendout from the regas termi-nal. As a matter of course, any schedule of unloading windows, whether coordinated or not, assumes a certain gas sendout profile. In a coordinated regime, however, a shipper’s failure to meet its sendout commitments could prevent not only its own, but also another shipper’s vessel from being allowed to berth and discharge, with potentially severe upstream and down-stream consequences.

Accordingly, under a TSA, the shippers must subject them-selves to enforceable procedures regarding sendout and coor-dinate in conjunction with any modifications to the schedule of unloading windows.

Sharing LNG, gas compositionThe opportunity to share LNG can be another powerful incen-tive to enter into a TSA. For example, the option to borrow LNG from another shipper provides a hedge against the risk that a shipper’s LNG tanker will discharge later than planned, for whatever reason, forcing the shipper to cover in the market. Furthermore, sendout reliability can provide greater confidence in higher baseload sales commitments.

While these principles are relatively straight forward to state, the mechanics implementing them can be more challenging. Significant considerations include the structure of the sharing arrangements, such as occasions for mandatory lending, the market cover obligations for failure to make timely repayment of borrowed LNG, and the possibility of the transfers giving rise to taxable events.

The TSA also can help shippers address gas-quality issues.

As regulators grapple with gas quality and interchangeability standards, shippers are left uncertain as to what, if any, gas-treatment facilities they will require at regas terminals. This uncertainty is exacerbated as LNG sources may change over the term of the contract and the market offers increasing oppor-tunity to profit by bringing in spot cargoes.

Through a TSA, shippers can benefit from sharing the strip-ping, nitrogen injection, or other treatment facilities that they have contracted for, as well as by effectively blending with one another’s cargoes.

Early vigilanceThe TSA is a complex agreement for which no template exists. Each TSA must be tailored for the particular circumstances of the terminal and the shippers that will be parties to the TSA. Depending on the number of parties involved and the intricacy of the issues, a TSA can take as long as 2 years to negotiate; 6 months should be considered a minimum.

Ideally, a shipper would execute a TSA and its TUA concur-rently, as the shipper’s rights at the terminal will be defined by the TSA as much as by the TUA. Practically, however, it will be difficult to achieve this because a shipper may not even know the identity of other shippers when it is negotiating for capacity with the terminal owner. Even if it does know the other ship-pers’ identities, the other shippers may not want to expend resources negotiating a TSA with a prospective shipper that may never consummate a TUA.

Failing simultaneous execution, a shipper may want a condi-tion to its obligations under its TUA on its ability to enter into a satisfactory TSA. The terminal owner, on the other hand, will want the shipper’s obligations under the TUA to contain as few “outs” as possible, especially those that appear discretionary.

In all events, the shipper must actively consider all critical TSA issues when it negotiates its TUA. The solutions to some of these issues may determine the ultimate profitability of the

shipper’s terminal capacity investment.

AuthorsJacob Dweck (jacob.dweck@sablaw.com) chairs the LNG

group at Sutherland Asbill & Brennan LLP, Washington. His 31-year experience covers all commercial regulatory aspects of oil, gas, power and other energy com-modities. He has counseled LNG clients in liquefaction projects, regasification terminals, project development, and key LNG contracts. Dweck holds a BA (honors; 1972) from the City University of

New York and a JD (1975) from Georgetown Law School.

Steven Sparling (steven.sparling@lngsolutionsgroup.com) is a principal with LNG Solutions Group, an alli-ance of det Norske Veritas, Sutherland, and Ziff Energy. Also a member of Sutherland’s LNG Group, Sparling manages projects throughout the LNG value chain, includ-ing siting of LNG import terminals, project development and regasification facilities, safety and security issues, stakeholder engagements, multi-user terminal matters, and negotiations for terminal expansion. Sparling holds a BA (1990) from the University of Pennsylvania and a JD (magna cum laude; 2000) from George Mason University School of Law.

Thomas Warren (thomas.warren@sablaw.com) is a partner at Sutherland in its Atlanta office and a member of the firm’s LNG group. His practice has focused on complex commercial transactions in the US and internationally, including LNG sale and purchase agreements, terminal-use agreements, terminal-sharing agree-ments, and other LNG contracts. Warren holds a BA from Williams College and a

JD (high honors) from Duke University School of Law.

European view neededThe views expressed here are based on the aurthors’ expe-rience with privately negotiated multi-shipper models and agreements. We have been intimately exposed for years to the terms of and practice under the Cove Point shippers’ protocol, and we have worked closely on multi-user issues at certain US unregulated merchant facilities.

While the authors have advised shippers regarding the evolv-ing rules for shared access to European Union terminals, as they vary from member nation to nation, we have not had input into formulation of such multi-shipper rules. We encourage a knowledgeable European regulator, therefore, to publish a fol-low-up LNG Observer article about multi-shippers issues in the EU environment.