Long Term Gas Supply Contracts: Europe

Late Registration and Coffee

Opening Remarks from the Chair

Improving the Way Price Revision Negotiations and Disputes Are Conducted

Negotiation phase

• How to create an incentive scheme
• How to define benchmarks and objectives
• Abandon “formal negotiations”?
•  Make use of alternative dispute resolution mechanisms before turning to arbitration

• Involve industry experts to challenge your case
• Choose a coherent and complementary team of lawyers, experts and witnesses to support your case
• Alternative claims/arguments
• The role of document production and preparing for it

• Use industry experts rather than lawyers as arbitrators?
• Interpretative guidance rather than decision on new price as primary objective?
• Common law vs. civil law: does it make a difference in practice?
• Adjusting claims /arguments – sign of strength or weakness?

• Are price reviews still required?
• Include current market as basis into price review clauses?
• Establish dispute adjudication boards for LTCs?
• Publish awards as guidance for industry?

CONTRACTUAL TERMS

What Industry Practises are Internationally Recognised in Relation to Contract Clauses?

• Dealing with the impact Res Judicata in price revision disputes
• Factors to consider in order to apply a “Take or Pay” Clause.
• Force majeure clauses.
• Issues arising from take or pay clauses that are backing up the LTG:
  • Problems arising when too much capacity is contracted and it needs to be optimised.
  • Understanding how much capacity to re-contract by 2019-2022
  • Implications on the increase of cost of capacity.
• Hardship model clauses: are they applicable for re-negotiation of a contract under the current economic climate?
• Destination clauses
  • Do destination clauses no longer work for producers due to reloading?
• How is a revision of the contract price limited in case of a hardship clause?
• Different clauses to be considered when negotiating a contract:
• How do caps on production affect the terms of the contracts?
• After years negotiating and re-negotiating LTG, is there a lex mercatoria emerging as an aid of interpretation to all Long Term Gas contracts?
• The implications of the long-term nature of LTCGs for their interpretation and application

Networking Lunch

A Deep Analysis on Price Formation, Price Revision and Re-Opener Clauses

• How the price formation is changing in LTC?
• Main components of the formulae you need to establish during negotiations
• What the right price for Long Term Contracts should be? How should it be determined?
• What should be have been the most relevant changes in the pricing mechanisms? What should be the optimum pricing mechanism?
• Challenges of setting Long Term expectations for prices in a contract: finding ways to have the flexibility to adjust to important changes in the market
• Are the parties enabled to amend the pricing terms to the new changed environment throughout the contract terms?
• What is/is not a Price revision clause?
• What is possible with a price revision clause? Do Changes in price imply changes in other provisions?
• Renegotiating price revision clauses that were agreed at the time where the people who were agreeing them could never foresee the future as it is today
• Is there a price revision case in which an existing oil-index formula will be changed to 100% hub price on the basis of a pure price revision clause?
• What is in reality the ability of parties to re-open price?
• What are the price re-opening mechanisms for existing contracts that are currently enforced?
• Price re-adjustment clause: how do you calculate the new price?
• How to identify and build a different pricing systems depending on where and what the natural gas is going to be used for?
• How to negotiate a lower price and differentiated price structure i.e. new indexation that reflects the value of LNG instead of the value of oil?
• How to resolve the expectation gap between sellers and buyers arising from the mutually acceptable price via negotiation?

Re-Structuring Contracts that Are Currently Being Discussed

What is the role of legal going forward supporting oil companies in drafting new contract arrangements?

• What type of new deals are being discussed? What is their duration?
• What kind of volumes are being agreed?
• What is the risk that you should take according to your company portfolio?
• What is the risk that you should take according to your company portfolio?
• Will you need to sign a LTGC to ensure security of supply?
• Re-negotiating a contract when you have no other option and cannot replace the existing LTGC with anything else.
• How to deal with the LTGC that have been in the market for a long time?
• How can you respond to the fundamentally change market conditions in these contracts?
• What are the advantages of an early termination when price revision is not sufficient?
• Understanding on your existing contracts: freedom and flexibility in different contexts.
• Should buyer margin granted under LT oil indexed contracts be preserved when these contracts are migrated to Gas Indexation?
• Does re-negotiating contract price defeat the purpose of putting a contract in place? Would it be advisable to put an explicit cap and floor to the contract price?

The Global Context for European LTCs and Pricing

• Role of Europe within the global gas and LNG industry
• Europe’s declining production and emerging competition between pipeline and LNG supplies for growing incremental demand
• Global outlook for LNG supply, demand, and supply balances
• Contractual and commercial features
• Outlook for North American shale and LNG financing, supply and pricing
• Outlook for LNG surpluses, and when and where they will be absorbed.
• Outlook for European imports, import dependence, and import competition
• Role of LNG in Europe’s future trade, liquidity, pricing and LTC terms

Afternoon Refreshments Sponsored by

LNG

Global Oversupply Due to LNG and its Impact on Pricing

Traditionally, all developments of LNG were backed up by oil-indexed contracts. Now that the market is becoming liquid: How will it affect LTG supply contracts in future? Will they still exist in the near future?

• Is LNG becoming sufficiently liquid that it has its own pricing mechanisms?
• US LNG Contracts – is there any scope for price reviews of these contracts?
• How this new source of supply (LNG cargos to europe) will be affecting the historic suppliers.
• Will US variable cost drive price in Europe even if the two largest suppliers have potentially a strong influence on the market?
• Analysis of demand looking forward to 2025: what is the impact of potential carbon tax and the effects of COP21?
• With LNG facilities in the Black Sea, how do you get LNG through the Bosphorus, currently prohibited to transit by Montreux Agreement?
• What is the maximum additional LNG volume that could reach Europe on a transportation capacity basis?
• Will Canadian and “next generation” LNG projects take off? How are they going to affect LTG?
• Do LNG Reload assessments reflect the fair market value of the buyer’s alternative – and therefore the fair value to seller?
• Will LNG contracts eventually be priced at the same level as pipeline contracts?

Overcoming Issues Arising from Gas Storage

• What is the cost of storage when they are pre-determined by energy security necessity? Is there an alternative?
• How the decline of flexibility value in the market is affecting the storage?
• Is there a trend on increasing the LT commitment into booking the capacity?
• Trade vs storage surplus of gas: pros and cos
• Disputes arising from storage
• What will be the effect of bringing the Floating LNG and LNG platforms under construction in Europe?
• What is the LNG cargo definition of flexibility issues in relation to the enquiries by the EC?
• How can gas storage be used as a flexibility tool when you negotiate your LTG?

Afternoon Refreshments
Networking Reception Sponsored by

Morning Coffee

Opening Remarks from the Chair

What is the Impact of Hubs on LTG?

• How can the hub based pricing agreements be used to manage risk in your portfolio?
  • If hub minus prices give the buyer a guaranteed margin and eliminate volume risk, are hub minus prices fair and reasonable in allocating contractual risk?
• Analysing the current situation in Europe on the changing gas pricing formation, away from oil-indexation to gas-to-gas market pricing?
• Dominant hubs in Europe (TTF and NBP):
  • What is the total volume trade and how to incorporate this in discussions when renegotiating your contracts?
• Why and how hubs will change the relationship between historic suppliers in europe and buyers?
• Why would a seller want a hub minus contract in a liquid hub when it can sell on that hub without a discount?
• Can you negotiate a price below the hub price?
• With LNG glut coming and Brexit taking place, what do you expect to become a flaw in Atlantic and Pacific LNG pricing?
• Which conditions were triggering the upward trend observed on PSV in terms of tradability/liquidity?
• How would you determine whether you use NBP or TTF for indexation of LNG contracts?
  • What criteria would you be considering?
• Why is VTP influencing other hubs even though it does not have the same kind of liquidity and churn?
• Do hubs follow oil prices to any degree?
• Decline of Dutch volumes will impact the relative market share of sellers supplying EU. Will TTF price depend more on Norway and Russian suppliers?
• What is a physical flow requirement to maintain a successful, influential hub?

A world without price reviews?

Morning Refreshments Sponsored by

Shorter Term Contracts: A Trend or the Future?

• Can we see a trend to sign shorter agreements in Europe?
• What is the pricing difference between short and long-term gas supply contracts?
• Will there be long-term deals to foresee in the future?
• How the LNG coming from Australia and Africa is affecting these contracts?
• Is this portfolio going to become heavier in shorter-term contracts and lighter in Long term contracts in the next 15 years from now?
• Is there a trend not to take too much long term commitment?
• Is shortening of contracts being used as a risk hedging strategy?
• Do shorter-term contracts have the big advantage over LTGCs in avoiding price reopener arbitrations?

DISPUTE RESOLUTION

Planning for Potential Challenges Arising from Disputes

• What are the adequate means to respond to the fundamental changes of the past 10 years to bring agreements in line with the current market environment?
• What is the role of legal firms going forward in supporting the market players?
• Drafting a dispute resolution clause: what do I need to take into account?
  • Is there a faster and more inexpensive way to solve a dispute arising from a LTG?
  • Is there a more collaborative attitude to resolve disputes.
• In what instances is good to have a Dispute Resolution Forum?
• Is there a faster and more inexpensive way to solve a dispute arising from a LTG?
• Is there a more collaborative attitude to resolve disputes.
• Institutional arbitration vs ad hoc arbitration: pros and cons
• How to manage the dispute whilst keeping the commercial relationship between the parties
• Analysing the issues that may arise to enforce an award
  • Particular case of the “one off contracts”
  • State entities and different constituencies
  • Can an award be challenged in a domestic Court?
• Fail attempt to resolve a Q in arbitration – are there other ways and what is needed to do this?
• What makes an arbitration a quality experience: Important aspects and lessons learned

Networking Lunch Sponsored By

What Is the Future and Evolution of Long Term Gas Supply Contracts in Europe?

Two philosophies behind gas pricing models: spot markets and traditional contracts (Brent based model price)

• Are we moving to a universal price in Europe?
• Is Europe becoming sufficiently interconnected and liquid that the price of gas is the same less transportation costs?
• How will long-term contracts will be structured in the next 5-10 years?
• What are the implications of the OPEC and non-OPEC countries deal and when we can expect to see the impact on gas prices?
• Are we moving from a large proportion of oil-indexed gas to gas on gas pricing contracts?
• When would it be more convenient to have oil-indexed contracts in your portfolio?
• Would producers agree on a long-term basis to sell gas at commodity prices?
• What is the price benchmark for new contracts? Commodity price vs longer contract terms.
• Advantages and disadvantages of the commodity price: “Scarcity value”:
• Can you control your risk exposure by agreeing a commodity price, which will prevail at a certain time in the future?
• Pricing mechanism: is there an acceptance of the hybrid model proposed by Gazprom?
• What is the difference between gas and other commodities?
• Is there a rationale for long-term contracts with high flexibility to be priced above hub prices?
• What competitive advantage can producers offer their customers in a fully liquid market?
• Have producers introduced tracker prices with their customers in order to capture the value of forward gas prices?
• How do you measure annual offtake flexibility?
• How the diversification of supply sources are impacting upon gas supply contracts?

Chair’s Closing Remarks & End of Congress