Effective gas and LNG portfolio management in troubled times

The current wave of supply disruption and price escalation caused by the unrest in the Middle East could soon reach unprecedented levels, with knock-on consequences for producers, consumers, traders and transporters of pipeline gas and LNG around the world. The legal issues to consider for portfolio players and traders will be numerous and depend heavily upon their gas sale arrangements and business model. However, it is likely to be vitally important to consider a number of contractual and commercial issues:

• Force majeure – are the force majeure notices which you are giving and receiving for the sale, purchase or transportation of gas or LNG valid and effective? Could there be claims for hardship or frustration? Not every logistical or economic disruption gives force majeure relief to an affected person, what protection there is will depend on the terms of your contract, and the parallel processing of claims is likely to be key.
• Delivery failure – are the conditions right for where a failure to deliver gas or LNG could be contained or provided for in a liquidated damages/a non-delivery option regime which gives you or your supplier a right to elect not to deliver, limit liability and arbitrage the commercial position? What do you need to do to create, or to restrict, such conditions?
• Priority customer rights – are you bound by, or do you benefit from, rights in respect of priority (foundation) customers for the purchase of gas or LNG?  What are the practical benefits which these rights apply, the circumstances in which the rights could be disapplied, and the ways in which these rights could be protected?
• Gas and LNG prices and tariffs – can you restrict escalations in your indexed prices, agreed tariffs and committed transportation costs?  How will you address the impact of state-imposed price caps and block activities?  What should you do now to position yourself for the future application of price protection provisions?
• Volume flexibilities – what does your contract say about the rights and responsibilities associated with rights to interrupt, cancel, or suspend (and to make good) gas and LNG deliveries? What limits the exercise of these rights, and are they always the best commercial option to exercise? How does this interface with take-or-pay obligations?
• Workarounds – what ad hoc arrangements can be negotiated on short notice to benefit both sides of a contract. ‘Workarounds’ here could include gas and LNG swaps, redirections and benefit sharing, and the use of constrained pipeline capacities and LNG shipping ullage on a collaborative basis.  How are workarounds best negotiated and documented in an expedited but effective manner?
• Contract management – now is the time to ensure that all contractual notices are validly given and received.  Are the current events starting the clock ticking on possible contract suspension and termination rights?  Are the current and prospective requirements of your insurance cover being properly complied with and administered?
• Preparation for disputes – how are you managing your communications with your counterparts whilst also preparing for potential disputes? Preserving and protecting your position today for future dispute resolution is essential. Are your internal communications protected by legal privilege? If not, what will others think about them in the event of a dispute?

All of these issues are critical to protecting your positions, and should be considered in a wider review of risk mitigation strategies, portfolio optimisation opportunities, and contract gap analysis. Now is the time for every affected person to examine its contract and market positions, and to take sustainable, protective steps for effective portfolio management and the protection of contractual provisions.