LNG Disputes on the Rise

Although some in the LNG industry are generally aware of price review disputes (mostly in Europe) that occurred during the last decade, the growing overall trend globally in LNG disputes1 (especially via international arbitration) is relatively unnoticed. In fact, King & Spalding has identified, from public and confidential sources, at least 72 notable LNG disputes,2 with half of these identified disputes occurring since 2010.3  In the vast majority of these disputes, one or more parties eventually resorted to filing arbitration or litigation to resolve their disagreement.

Illustrations of public LNG disputes in 2016 are:

• Gail’s effort to renegotiate its long-term LNG SPA with Gazprom by delaying receipt of deliveries, alleging that Gazprom’s change of the Russian liquefaction plant (from the now-cancelled Shtokman project to the under-construction Yamal project) to supply LNG to India was a breach of contract;
• Eni USA’s filing for arbitration seeking to terminate its terminal use agreement (TUA) with Mississippi terminal owner Gulf LNG, alleging that (i) changes in the U.S. natural gas market since execution of the TUA in 2007 have “frustrated the essential purpose” of the agreement; and (ii) activities undertaken by Gulf LNG affiliates “in connection with a plan to convert the LNG Facility into a liquefaction/export facility have given rise to a contractual right…to terminate” the agreement;
• Arbitrations filed or threatened by contractors of newly-constructed LNG infrastructure, including the consortium that built Poland’s new LNG terminal (PBG, Saipem and Techint Compagnia) for Polskie LNG and the consortium that built Gorgon’s LNG jetty (CIMIC and Saipem) for Chevron Australia; and
• Texas and Louisiana litigation between Parallax Enterprises and Cheniere LNG Terminals regarding the potential joint development of two liquefaction plants in Louisiana.

Of the 72 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 Shipowners 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 Shipbuilders and Related Parties
• 1 addressed issues between Project Sponsors and Insurers
• 1 addressed issues between Sponsors of Different Export Projects

Implications from these disputes are numerous, but some key observations are as follows:

• Pricing under LNG sales contracts has been the most frequent subject of the dispute (especially in relation to sales to Europe);
• Edison of Italy has been the buyer most frequently a party to a dispute, while Sonatrach of Algeria has been the seller most frequently a party to a dispute;
• No arbitrations have been brought by a Japanese, Chinese or Korean buyer against an LNG seller;
• India’s Dabhol import project generated a number of public arbitrations, including 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) and one political risk insurance (OPIC) case;4
• More than a dozen “disputes” did not result in any litigation or arbitration, as the parties found a way to renegotiate their agreements or otherwise work out their serious commercial issues;5 most of those settled “disputes” involved Asian parties or claims under construction contracts (particularly for recent Australian projects);6 and
• Arbitrations have most often been brought under the rules of UNCITRAL, followed by ICC, AAA, and ICSID. Not surprisingly, arbitrations were most often held in London, Geneva, New York, the Hague, and Paris.

ISSUES BETWEEN BUYERS AND SELLERS

Price disputes have often arisen, with buyers alleging that downstream market changes justify allowing the buyer to reduce the contractual price it must pay. In better market periods, price disputes have resulted from LNG cargoes being diverted by the buyer to a different destination and sold at a higher price than the buyer originally paid the seller. In addition, several disputes have arisen for non-pricing reasons; for instance, a large arbitration award was issued against a seller who failed to supply contracted LNG.  Some disputes have required creative approaches to settle and avoid large damage awards: Nigeria LNG’s 1996 breach of contract arbitration against ENEL of Italy for $13 billion (reportedly the largest claim ever brought under English law at that time) was settled after Nigeria LNG agreed to ship LNG to France (instead of Italy), in exchange for Russian gas being diverted by French buyers to Italy.

Example Dispute between Buyers and Sellers:

Statoil v Sonatrach (2013) – A $536 million ICC award was issued for Statoil against Sonatrach in connection with the breach of three Heads of 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.  Sonatrach failed to supply Statoil with LNG under one Heads of Agreement and failed to deliver any LNG or purchase any natural gas under two other Heads of Agreements.  Statoil issued a Request for Arbitration in 2010; the seat of the arbitration was London, although arbitration hearings took place in Lausanne and Paris.  Sonatrach claimed that the three agreements were not effective because a condition precedent (approval by the Algerian Government) had not been fulfilled. The ICC panel deciding in favor of Statoil was made up of three Swiss and French jurists: Professor Pierre Tercier, Dr. Wolfgang Peter and Professor Charles Jarrosson.

ISSUES BETWEEN GOVERNMENTS AND PROJECT SPONSORS

Several Government-related disputes have involved either disagreement on the manner in which the petroleum contractor’s investment should be carried out or on the contractor’s failure/delay to proceed with development/construction of an anticipated LNG export project. Moreover, disputes have occurred from project sponsors not sharing with the Government certain revenues from LNG cargoes sold to higher-priced markets. Two cases involved actual Government expropriation (Dabhol) or extreme pressure causing a sponsor to sell a portion of its project interest to the Government.  One ongoing dispute in Egypt addresses effects from shutdown of the LNG export project due to shortage of gas supply.

Example Dispute between Governments and Project Sponsors:

PetroPeru v. Camisea Gas Consortium (2015) – The International Centre for Settlement of Investment Dispute (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).  In May, 2015, the ICSID tribunal (consisting of arbitrators Eduardo Siqueiros (Mexico), Jose Emilio Nunes Pinto (Brazil) and Bernardo Cremades (Spain)) unanimously agreed with PetroPeru, awarding it approximately $64 million.

ISSUES BETWEEN LNG PROJECT SPONSORS

Unlike the above-mentioned disputes that most-often result in arbitration, disputes between LNG project sponsors have typically generated litigation more than arbitration. For example, in February 2016 a U.S. court held a general partner liable for damages of $100 million (plus interest) for breach of contract in connection with the 2010 purchase for $1.1 billion of various interests in an existing U.S. LNG import facility (which decision is currently being appealed to the Delaware Supreme Court).  Some sponsor disputes determined which company should have the right to participate in an LNG project or its revenues.  A recent Canadian bankruptcy involved funding issues that necessitated a reorganization of the export project, while a U.S. case found that the General Partner breached the Limited Partnership Agreement.

Example Dispute between LNG Project Sponsors:

Talisman v. CNOOC (2008) – In 2008 Talisman Energy finally settled a dispute with CNOOC over Indonesia’s Tangguh LNG project when CNOOC sold a 3.057% stake in the project to Talisman for $212 million.  Talisman had sued CNOOC in Dallas County, Texas court in 2007 for failing to offer a participating share in the Tangguh LNG Project in Indonesia and other related properties. Talisman claimed the right to 44% of CNOOC’s 17% interest in the Tangguh LNG Project.  The dispute centered on a 1968 agreement between Warrior International, Independent Indonesian American Petroleum and Carver Dodge International.  The 1968 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.  Warrior was later acquired by Paladin Resources, and Paladin Resources was later acquired by Talisman. Independent Indonesian American Petroleum’s interest in the agreement was subsequently acquired by YPF Maxus (in due course owned by Repsol) and in 2002 CNOOC acquired the asset from Repsol.  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.

CONCLUSION

It is challenging to point to a single factor accounting for the increase in LNG disputes since 2010 as compared to those occurring during the first four-plus decades of the evolution of the LNG industry. On reflection, perhaps such disputes may have derived from one or more of the following:

• disagreements over how profits derived from a disparity of prices between pricing regions should be shared;
• governments asserting more control over their gas resources;
• unexpected LNG price increases and decreases causing a disconnect with buyer’s downstream markets or causing seller’s revenues to be less than expected;
• new players participating in the LNG industry that are less “long-term relationship oriented;” and/or
• simply a reflection of the realities of LNG losing its niche fuel label, as it has grown to be the second-most traded “commodity” after crude oil.