ASIAN OFFSHORE ENERGY CONFERENCE DISPUTES IN LNG CONTRACTS

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1 ASIAN OFFSHORE ENERGY CONFERENCE 28 SEPTEMBER 2017 DISPUTES IN LNG CONTRACTS Bob Broxson BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

2 Discussion Topics Background of LNG Market and History LNG Global Supply and Demand LNG Pricing LNG Fleet LNG Contracts Areas of Potential LNG Disputes 2

3 Background of LNG Market and History 3

4 LNG Value Chain Supply Demand 4

5 LNG Global Supply and Demand 5

6 LNG Trade Volumes, Global LNG trade set a new record, reaching 258 million tons which is an increase of 13.1 MT (+5%) from Short and medium-term LNG trade reached 72.3 MT in 2016 (+0.4 MT YOY) and accounted for 28% of total trade The share of LNG traded without a long term contract as a percentage of the global market has tapered off since

7 2016 Incremental LNG Exports by Country Relative to 2015 Total Export Global supply will jump 44% by 2020 versus 2015 as projects from Australia, US and Russia come online 7

8 2016 Incremental LNG Imports by Country Relative to 2015 Total Imports Strong growth from China, India and new markets are out pacing falling demand from Japan, UK and Brazil Asia Pacific remained the largest market by a comfortable margin in 2016, taking in 53.6% of global supply 8

9 Asia High Demand LNG Balances Case 9

10 Asia Low Demand LNG Balances Case 10

11 LNG Pricing 11

12 Historical Crude v US Natural Gas Prices 12

13 Global Historical LNG Prices and WTI 13

14 LNG Price Drivers North America gas prices set at liquid trading hubs (Henry Hub) In Europe, wholesale gas is sold mainly via long term contracts (gas hub based or oil-linked pricing or both) Asia and many emerging markets, the price of LNG is generally oil linkages, supplemented by smaller share of spot imports Prices are predicted to remain constrained beyond 2020 drive by: - Strong growth from China and India not enough to offset falling demand from Japan and Korea - Global supply will jump 44% by 2020 versus 2015 as projects from Australia, US and Russia come online - LNG supply will be curtailed where the short run marginal cost is highest: US LNG projects and the coal seam gas fed projects on the east coast of Australia - US LNG capacity lying idle, US gas prices will begin driving and suppressing global spot LNG prices. 14

15 LNG Fleet 15

16 LNG Carriers Total active fleet in 2016 was 439, included additional 31 convention carriers added to global fleet, with 2 retiring Average ship capacity of new builds increased by 4.5% in 2016 to 170,066 cm 16

17 LNG Tanker Fleet and Older Portfolio in the years

18 Estimated Long-term and Spot Charter Rates verses New Build Orders, Buildout of new tonnage has consistently outpaced the incremental growth in globally traded LNG during this period, which has been reflected in strong decline in charter rates Charterers prefer larger tankers that reduce the unit cost of transported LNG 18

19 LNG Contracts 19

20 Changes in Contract Length Short, Medium and Long-Term Trade Non Long-Term Volumes 20

21 Flexible Volumes 21

22 Drivers of LNG Contract Changes Growth of non-long term contracts accelerated in 2011 (Fukushima & growth of US Shale) - Growth of LNG contracts with destination flexibility - Increase in number of exporters and importers - Lack of domestic production or pipeline imports in Japan, South Korea and Taiwan (sudden changes in demand like Fukushima) - Decline in competitiveness of LNG relative to coal (Europe) and shale gas (North America) has freed up volumes to be re-directed elsewhere - Large disparity between prices in different basins from 2010 to 2014 made arbitrage an important and lucrative strategy - Faster development timeline and lower initial capital costs of FSRUs compared to onshore regasification allowed new countries to enter LNG market - Large growth in the LNG fleet 22

23 Areas of Potential LNG Disputes 23

24 Potential Reasons for LNG Disputes Pricing under Long Term LNG Contracts Destination restrictions bar importers from re-selling contracted cargoes Supply Glut leading to lower prices Discovery of gas supply domestically when previously had a shortage Underutilization of Regasification or Liquefaction Capacity UAE ban on all ships loading or discharging cargo destined for or coming from Qatar 24

25 LNG Disputes Noted through LNG disputes noted: 25 addressed issues between buyers and sellers 12 addressed issues between governments and project sponsors 12 addressed issues between project sponsors 8 addressed issues between project sponsors and contractors 6 addressed issues between LNG ship-owners and charterers and related parties 3 addressed issues between tolling companies and customers 2 addressed issues between project sponsors and lenders 2 addressed issues with ship-builders and related parties 1 addressed issues between project sponsors and insurers 1 addressed issues between sponsors of different export projects 25

26 Public LNG disputes in 2016 are Gail s effort to renegotiate its long-term LNG sale and purchase agreement (SPA) with Gazprom. Eni USA s filing for arbitration seeking to terminate its terminal use agreement Arbitrations filed or threatened by contractors of newly constructed LNG infrastructure Texas and Louisiana litigation between Parallax Enterprises and Cheniere LNG terminals regarding the potential joint development of two liquefaction plants in Louisiana 26

27 Key Observations Regarding Disputes Pricing under LNG sales contracts has been the most frequent subject of the dispute (especially in relation to sales to Europe) Edison (Italy) has been the buyer mostly frequently a party to a dispute, while Sonatrach (Algeria) has been the seller mostly frequently a party to a dispute No arbitrations have been brought by a Japanese, Chinese or Korean buyer against an LNG seller Dabhol (India) import project generated a number of public arbitrations, One by the U.S. government against the government of India, Two UNCITRAL-governed bilateral investment treaty (BIT) cases (one under the India-Mauritius BIT and one under the Netherlands-India BIT) One political risk insurance (OPIC) case More than a dozen disputes did not result in any litigation or arbitration 27

28 Disputes Between Buyers and Sellers 28

29 Disputes Between Buyers and Sellers Statoil v. Sonatrach (2013) ICC award was issued for Statoil against Sonatrach of $536 Million Breach of Three Agreements signed in 2008 Under those contracts Sonatrach was to supply Statoil with LNG and to purchase an equivalent amount of natural gas from Statoil Statoil claimed that the three agreements were not effective because a precedent (approval by Algerian Government) had not been fulfilled 29

30 Disputes Between Governments and Project Sponsors 30

31 Disputes Between Governments and Project Sponsors Petro Peru v. Camisea Gas Consortium (2015) ICSID found in favor of state-run PetroPeru as to the proper calculation of royalty payments related to LNG cargoes that were unloaded and then later reloaded and delivered to another, higher LNG-priced market In 2011, PeruPetro determined that several LNG cargoes originally destined for the Freeport, Sabine Pass and Cameron import terminals in the U.S. during the prior year had later been re-exported to Asia In September 2012, PetroPeru sought compensation for royalties lost as a result of the reload, claiming that royalties were to be calculated and paid based on the final destination of the LNG. The Camisea Gas Consortium s view was that royalties were to be calculated based on the shipment s first unloading destination (regardless of whether the cargo later went somewhere else). 31

32 Dispute between LNG Project Sponsors 32

33 Dispute between LNG Project Sponsors Tailsman v. CNOOC (2008) In 2008 Talisman Energy finally settled a dispute with CNOOC over Indonesia s Tangguh LNG project when CNOOC sold a percent stake in the project to Talisman for $212 million Talisman claimed the right to 44 percent of CNOOC s 17 percent interest in the Tangguh LNG project. The agreement contained an area of mutual interest clause requiring a partner to offer the other partner(s) a participating share if it acquired an exploration interest in Indonesia. Talisman had claimed that its rights and CNOOC s obligations under the 1968 area of mutual interest clause were still effective despite the various acquisitions and transfers since the original contract was signed. 33

34 34 QUESTIONS?

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