The 15th Annual APS Conf. In Tehran - Susan Farmer.

Susan Farmer, Senior Partner at the London-based international law firm, Denton Wilde Sapte (DWS) gave a detailed review of issues in LNG sales contracts.

Denton Wilde Sapte (DWS), a prominent law firm involved in the LNG business on both sides of Suez and in Middle East gas and petrochemicals projects, was one of the sponsors of the APS Conference. Ms Susan Farmer, a senior partner at DWS, gave a unique insight into LNG sales contracts which got extensive coverage in the Iranian press - an interesting development as she was one of ten US participants who travelled to Tehran for this event.

Ms Farmer said that, as the LNG business moves into new and less structured market with greater risks, there is an increasing variety of complex mechanisms needed to maintain the security of contracts at present standard. "But sellers, too, must understand the new buyers' market in order to exact the right terms and escape clauses".

Over the next two decades, she noted, "gas consumption is predicted to increase at a rate at least three times the rate of increase of oil consumption. In particular, use of natural gas as fuel for power generation is predicted to increase dramatically over the next decade; its share of the total power generation fuel supply could rise accordingly from about 15% today to 24% in 2010, whereas coal's share is expected to remain about the same at 38%. The advent over the past decade of combined cycle gas turbine (CCGT) power generation technology, with its advantages of lower cost, shorter construction time, high efficiency and less pollution has been a strong driver for further expansion of the natural gas and LNG markets".

Ms Farmer added: "Expansion of LNG trade beyond the traditional buyer base requires sellers to deal with different types of buyers and markets, and requires acceptance of a different allocation of contract risks than before. LNG sellers are being asked to consider a variety of pricing terms depending on the particular situation in the buyer's market, including tolling arrangements, where the price paid for LNG/gas is tied to the revenue received for the electricity generated; netback prices based on the buyer's realised gas resale prices; prices indexed to competing fuels, including fuel oil, gasoil and/or coal and/or local electricity indices; and as in the US, NYMEX quoted gas prices.

"Increasingly new LNG buyers are less creditworthy than the traditional financially strong monopoly utility and energy company buyers which supported the first generation of LNG sales. One of the new type of buyers is the project-financed independent power project ("IPP") which is dependent on tariff revenue payable pursuant to a power purchase agreement ("PPA") by a state electricity board. Difficulties which may arise for long term fuel suppliers in this situation are illustrated by the current situation with the Dabhol IPP in Maharashtra, India. Buyers are increasingly less willing or able to interpose large balance sheets between themselves and their resale market risks, thus requiring sellers to expend significant resources to understand the risks and then to identify strategies for their mitigation. How can sellers protect themselves from these risks?"