LNG project structure varies significantly from project to project. There are, however, some concepts that are common to projects that contemplate ownership of, or interest in, one or more LNG trains being disproportionate across a project. This variation in ownership or interest ("Participation") may arise at the time of project inception, or it may result from project expansion. In addition, regulatory authorities may mandate third party access to some of the infrastructure or the land on which the project is situated. In each case, when Participation is not consistent, integration of the project is typically achieved both contractually and technically through the shared (or common) facilities. In these circumstances, there are defined facilities that are shared across the project to ensure all project participants (irrespective of when they came into the project or the level of project Participation) have reasonable access to facilities that are required to enable each LNG train participant (or participant group) to deliver gas (for liquefaction) and store and lift the resulting LNG. This paper explores a few of the key attributes of a shared facilities agreement and key elements of such attributes. It also illustrates the complexities involved in an integrated LNG project.
Scope of Agreement and Facilities
Each LNG project will vary with respect to the scope of facilities covered by the agreement and the protocols for access and use thereof. The shared facilities typically do not include the LNG trains that process the natural gas into LNG. The facilities defined as shared will vary from project to project. The spectrum ranges from all facilities and equipment (other than the LNG trains) as comprising shared facilities, to only lifting facilities (or LNG storage and lifting facilities) being categorized as shared facilities. Typically, however, gas and LNG processing-related infrastructure (such as pre-treatment facilities) is shared across LNG trains as sharing such infrastructure may significantly increase efficiency and is often fundamentally necessary to include as shared facilities. For purposes of this article, infrastructure will be considered shared facilities. The shared facilities agreement defines clearly specific facilities that are to be shared (specifying interfaces and boundaries, as well as, specific equipment), and the terms upon which sharing will take place. Depending on the LNG site, the initial project plans, and government or other requirements, the agreement may also establish the terms for expansions – the incorporation of future LNG trains into the overall project – and the extent to which facilities existing prior to expansion will be shared with participants in an expansion. Because the lifting facilities and jetty often comprise part of the shared facilities, the shared facilities agreement may contain lifting terms as well.
Governance Committee
Depending on the corporate or similar governance that is adopted by participants in an LNG project, the significance of the management committee under the shared facilities agreement may vary. Participants within an overall project (across the LNG trains) often look for some level of involvement in the management of the shared facilities. This involvement varies depending upon Participation and can range from informational only Participation to full voting rights. As with most management, coordination and operational committee structures, the agreement typically sets forth specifics about meetings and governance. Project governance structure will drive the depth of scope of the governance committee and related provisions in the agreement. If a project entity has been established, the shareholders agreement may bring definition to governance negating the need for detailed provisions in the shared facilities agreement. It may be that one of the project participants will serve as the entity that operates the shared facilities, and the governance committee is tasked with some level of oversight or given the right to receive information. If this is the case, the operator is often appointed in the shared facilities agreement. Operatorship can become a heavily negotiated term in the agreement. The possibilities are numerous in terms of establishing a governance committee and the breadth of its mandate.
Capacity
Allocating capacity of shared facilities and infrastructure is essential. Project participants develop a methodology for allocation of capacity in the facilities and associated cost sharing. The manner in which capacity is allocated may impact future train debottlenecking and expansions, depending on excess capacity that may exist at the time of initial project completion. In the event the allocation methodology results in the possibility of excess capacity, agreement as to participant access to excess capacity will ideally be reached up-front and documented in the shared facilities agreement.
During the course of operations, the facilities may have under-utilized capacity that has been allocated to one or more parties. Typically, the overriding objective of any integrated LNG project is maximization of LNG output from the project. In order to achieve this objective, the parties may agree to terms that enable participants to have access to each other's under-utilized capacity. These terms often include both capacity allocation and shifting of some, or all, of the cost associated with use of such capacity. Use of under-utilized capacity is typically fully interruptible so that the participant who holds the right to the capacity does not lose it during a period of re-allocation.
In addition, operational constraints may reduce the capacity available to the participants at any point in time. Consideration should be made in the documentation as to how such a reduction will impact the project participants. If fault for a constraint is not attributable to one or more participants, and no party has a contractual priority that was previously agreed, the reduction in capacity as a result of operational constraints may simply be pro-rata among all project participants.
Liftings
The means and process rules by which LNG is transferred from storage (and therefor the LNG project) into a form of delivery transportation (typically an LNG ship) is of great interest to all project participants. The process itself (called lifting) is operational and many contract terms are operational in nature. However, the scheduling function, allocation methodology for allotting LNG to project participants, measurement parameters, allocation of liability associated with failures to lift, and similar issues are critical project considerations and should be well documented. The lifting terms may be in a standalone document or be part of another project agreement; however, if they are not part of the shared facilities agreement they are typically linked to it. The lifting schedule is established with project participant input and is typically designed to allocate LNG on a non-discriminatory and ratable basis determined on an energy-in (feed gas supplied by a participant)/energy-out (LNG allocated to a participant) basis. Over the course of time, unscheduled or "excess liftings" will need to be accounted for. Assignment of excess liftings to one or more project participants is typically done in accordance with the same allocation methodology (energy-in/energy-out) and same principles of non-discrimination.
Expansions
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Many LNG projects are sited or planned to allow for additional LNG trains to be constructed and integrated into the original project at some point in the future. These LNG trains may or may not be specifically contemplated at the time the original facilities are constructed. The tremendous capital expenditures required for infrastructure and ancillary facilities, some or all of which become the shared facilities, during initial project development often result in an opportunity, through expansion, for the original project participants to recoup some of their initial capital investment for excess capacity in such facilities and infrastructure. Principles of expansion are often agreed by the original project participants in an effort to establish the framework by which third parties may enter an existing LNG project by constructing additional LNG trains and utilize the shared facilities without a material adverse effect on existing operations. This framework is often set forth in the shared facilities agreement because, at the time of expansion, the participants in a proposed LNG train will have access to shared facilities, or will contribute new facilities to the shared facilities, as the new train is integrated into the existing project. The allocation of original capital expenditure and credits for contribution of new shared facilities are often formulated in the expansion terms. Principles for expansion may require pre-consent by existing parties to a future expansion (as long as basic criteria are met). Specified liabilities are assumed by the parties having a Participation in the new LNG train as further protection to the original project participants. Typically, terms for an expansion will mandate that the expansion will not adversely impact the then existing project (including capacity), that the expansion will be in compliance with applicable regulations and laws, that the expansion will be in conformity with established gas specifications and other project specific requirements. The post-expansion capacity in the shared facilities will also need to be established based on a pre-agreed formula that is included in the shared facilities agreement.
Other Key Provisions
Other key terms that are generally agreed in the shared facilities agreement include work programs and budgets, modification and capital contribution requirements, decommissioning of facilities, and default provisions.
Conclusion
Allowing for disproportionate ownership within an integrated LNG project offers opportunities to existing and future project participants. Such ownership also adds complexity to an already complex project structure. Understanding the complexities and addressing them at the onset places project participants in a position to proceed with confidence to project completion and execution.
Kathryn Marietta
Houston
+1 713 276 7372
kmarietta@kslaw.com
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