1ST ICC AFRICA REGIONAL ARBITRATION CONFERENCE, LAGOS. NIGERIA. PARALLEL SESSION ON ENERGY DISPUTES Take or Pay Gas Sales and Gas Pricing Disputes Lekan.

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1ST ICC AFRICA REGIONAL ARBITRATION CONFERENCE, LAGOS. NIGERIA. PARALLEL SESSION ON ENERGY DISPUTES Take or Pay Gas Sales and Gas Pricing Disputes Lekan Ogunleye 21 st June, 2016

Take or Pay “ToP” & Gas Sale Agreements  Background to ToP in Gas Contracts: Gas production is capital intensive with longer cost recovery period. Consequently, there is need for security of revenue stream to the Gas producer;  Concept of ToP: ToP has emerged as a contract performance incentive mechanism widely used in Gas Sale Contracts.;  Key Benefits of ToP: Bankability - A major enabler for the development of new Gas Projects including Gas delivery infrastructure especially in developing markets. Balances risks- producer bears production risk & the purchaser bears the risk of market demand;  Take or Pay & Deliver or Pay “DoP”: DoP likewise incentivizes the performance of the Seller’s obligation.

Take or Pay in Gas Sales Contracts- Other Issues for Consideration  ToP Calculation: The TOP threshold is usually set as a percentage of the ACQ after netting off Seller’s non-delivery quantities, off-spec Gas and quantities not delivered due to FM or Allowed Mtce.;  Make Up Rights: If Purchaser has paid for any ToP quantity, then, in the same or subsequent Contract Year(s), it is entitled to take delivery of an equivalent quantity of Gas (“Make Up” Gas) generally without additional payment subject to certain pre-negotiated terms ;  Carry Forward Rights : the right to transfer the volume taken above the contracted quantity in a given period to the next periods in order to mitigate any potential ToP exposure;  ToP Liability Vs Relaxed & Flexible transactional culture: The magnitude of the ToP obligation & potential loss of Make Up rights could instigate contractual disputes.

Gas Pricing Approach in Nigeria  Key Characteristic: The Nig. domestic Gas sector prices are still significantly Govt. regulated due to its fledging state & illiquidity, though “willing buyer- willing seller” deals are increasing ;  General Gas Pricing Approach: US dollar linked- sector based pricing; Gas Based Industries, Power, Commercial ( includes offtakers from the transmission system such as most cement plants and Industries supplied through the distribution system and whose price is inclusive of distribution tariff) ;  Role of the Gas Aggregator: current structure prescribes the existence of a Gas aggregator- GACN (To determine an aggregate price based on the volume offtake and price for each sector);  Other Pricing Options: Netback pricing, Indexation of Gas price to the price of competing fuels (e.g Crude Oil price linked pricing or Fuel Oil indexed pricing) also prevalent;  Annual Price Adjustment: The GSA contract price typically includes a price escalation mechanism to adjust for inflation.

Examples of Typical Triggers for Gas Pricing Disputes  Price Review “PR”: Most long term contracts include PR clauses. An effective PR clause should provide clarity on Trigger (e.g. change in law, significant change in the Gas mkt.), Procedure & Methodology;  Annual Price Adjustment/Escalation: Gas contract prices are usually adjusted annually to account for inflation etc. through an OECD Consumer Price Index linked formula;  Availability, Accessibility & Reliability of Data: differing views on the price of competing fuels, reliability of market data, illiquidity ;  Currency conversion Issues: disagreement on the applicable US$/Naira conversion rate (e.g. the monthly average of the central quotations for buying and selling US$ dollars as published by the CBN for the preceding Contract Month).

Resolution of Take or Pay Gas Sales and Gas Pricing Disputes  Amicable Resolution: given the long term nature of Gas contracts, counter parties more often than not directly engage to devise practical solutions to contractual disputes;  Expert Determination: Pricing & Gas offtake disputes are better handled by Experts due to their technical nature and general need for a speedy resolution. Often such issues are expressly stated as “Expert Matters”;  Arbitration: Most Gas contracts provide for referral of disputes (other than Expert Matters) to arbitration; &,  Others: Appeal of the Expert or Arbitral award to the Court; Waiver of Rights etc.

Summation of Key Messages ToP terms are useful contract performance tools in Gas Sale Contracts and major enabler for Gas asset development; The Profile & Good Standing of Prospective Counter party Key; Expert support for contract negotiation & documentation essential. E.g. Pricing provisions should be clear and navigable; Effective Contract Risk Mitigation- to address consequences of Project delays, Market developments, etc.; Need for realistic assessment of offtake requirements, market conditions etc.; Avoidance of Improper use of leverage – imposition non-market prices (excessively low or high prices) is a recipe for conflict; Communication, Data validation & Information flow are fundamental.

Thank You