1 Considerations in Gas Contracts Using LNG Supply Texas Utility Lawyers Association October 13, 2005 Craig Enochs Jackson Walkter L.L.P.

2 I.Introduction Times they are a changin.

3 II. Basic Differences between LNG and traditional North American Gas Supplies A. Transportation B. Scheduling C. Force Majeure D. Remedies

4 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. Liquefaction Ship Regasification

5 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline

6 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling

7 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – Scheduling based on the timetable for a ship to travel to a gas import facility.

8 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – scheduling based on the timetable for a ship to travel to a gas import facility 2.Traditional – scheduling based on pipeline capacity

9 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – scheduling based on the timetable for a ship to travel to a gas import facility 2.Traditional – scheduling based on pipeline capacity C.Force Majeure

10 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – scheduling based on the timetable for a ship to travel to a gas import facility 2.Traditional – scheduling based on pipeline capacity C.Force Majeure 1.Risk calculations are altered, with some risks increased and some decreased

11 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – scheduling based on the timetable for a ship to travel to a gas import facility 2.Traditional – scheduling based on pipeline capacity C.Force Majeure 1. Risk calculations are altered, with some risks increased and some decreased D.Remedies

12 II. Basic Differences between LNG and Traditional North American Gas Supplies A.Transportation 1.LNG – liquefaction to ship to degasification. 2.Traditional – pipeline B.Scheduling 1.LNG – scheduling based on the timetable for a ship to travel to a gas import facility 2.Traditional – scheduling based on pipeline capacity C.Force Majeure 1. Risk calculations are altered, with some risks increased and some decreased D.Remedies 1. The remedies available if seller fails to deliver may be inadequate

13 III. Analysis A.Transportation B.Scheduling C.Force Majeure D.Adequacy of Remedies

14 III. Analysis A.Transportation 1.Traditional gas assumes pipelines will be used.

15 III. Analysis A.Transportation 1.Traditional gas assumes pipelines will be used. 2.LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility.

16 III. Analysis A.Transportation 1.Traditional gas assumes pipelines will be used. 2.LNG uses ships and no pipelines if delivery point is the tailgate of the regasification facility. 3.Mixed bag.

17 III. Analysis B.Scheduling 1.Traditional Gas – scheduling flexibility

18 III. Analysis B.Scheduling 1.Traditional Gas – scheduling flexibility 2.LNG – limited ability to change scheduling

19 III. Analysis C.Force Majeure 1.Increased risks from use of LNG

20 III. Analysis C.Force Majeure 1.Increased risks from use of LNG 2.Decreased risks from use of LNG

21 III. Analysis C.Force Majeure 1.Increased risks from use of LNG 2.Decreased risks from use of LNG 3.Obligation to replace

22 III. Analysis C.Force Majeure 1.Increased risks from use of LNG a.Additional governmental regulation from country of export

23 III. Analysis C.Force Majeure 1.Increased risks from use of LNG a.Additional governmental regulation from country of export b.Isolation of supply due to concentration of supplies in a single ship

24 III. Analysis C.Force Majeure 1.Increased risks from use of LNG a.Additional governmental regulation from country of export b.Isolation of supply due to concentration of supplies in a single ship c.Inability to reroute transportation if the ship becomes unavailable

25 III. Analysis C.Force Majeure 1.Increased risks from use of LNG a.Additional governmental regulation from country of export b.Isolation of supply due to concentration of supplies in a single ship c.Inability to reroute transportation if the ship becomes unavailable d.Uncertainty as to which ship a certain transaction is sourced from

26 III. Analysis C.Force Majeure 1.Increased risks from use of LNG a.Additional governmental regulation from country of export b.Isolation of supply due to concentration of supplies in a single ship c.Inability to reroute transportation if the ship becomes unavailable d.Uncertainty as to which ship a certain transaction is sourced from e.Expanded geography

27 III. Analysis C. Force Majeure 2.Decreased risks

28 III. Analysis C.Force Majeure 2.Decreased risks a.Immune to pipeline breakdowns, ruptures, or malfunctions

29 III. Analysis C.Force Majeure 2.Decreased risks a.Immune to pipeline breakdowns, ruptures, or malfunctions b.Immune to many weather events affecting traditional supplies

30 III. Analysis C.Force Majeure 3.Obligations to replace a.If the delivery point is a pooling point or hub and an event of force majeure affects a sellers supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure?

31 III. Analysis C.Force Majeure 3.Obligations to replace a.If the delivery point is a pooling point or hub and an event of force majeure affects a sellers supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure? b.NAESB is unclear as to whether the seller is obligated to replace.

32 III. Analysis C.Force Majeure 3.Obligations to replace a.If the delivery point is a pooling point or hub and an event of force majeure affects a sellers supply away from the pool or hub, is the seller obligated to replace the volumes cut by the force majeure? b.NAESB is unclear as to whether the seller is obligated to replace. c.May be prudent to specify whether the seller has the obligation to replace.

33 III. Analysis C.Force Majeure 4.Adequacy of remedies a.Traditional gas – relatively easy to obtain alternate supplies at a pool or hub.

34 III. Analysis C.Force Majeure 4.Adequacy of remedies a.Traditional gas – relatively easy to obtain alternate supplies at a pool or hub. b.LNG – If the delivery point is the tailgate of the regasification facility, it will be appreciably more difficult to obtain alternate supply.

35 III. Analysis C.Force Majeure 4.Adequacy of remedies a.Traditional gas – relatively easy to obtain alternate supplies at a pool or hub. b.LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply. c.Specific performance.

36 III. Analysis C.Force Majeure 4.Adequacy of remedies a.Traditional gas – relatively easy to obtain alternate supplies at a pool or hub. b.LNG – If the delivery point is the tailgate of the degasification facility, it will be appreciably more difficult to obtain alternate supply. c.Specific performance. 1.)Without specific performance, the buyer may not have an adequate remedy if the LNG seller fails to deliver.