1. Steven R. Miles Baker Botts L.L.P. January 15, 2013 New York, NY
Legal Structures and Commercial Issues for LNG Export Projects -- North America & Beyond
Steven R. Miles
Baker Botts L.L.P.
January 15, 2013
New York, NY

2. Presenter Introduction
Recent LNG Deals:
Developing greenfield LNG liquefaction projects:
Sabine Pass LNG Wheatstone LNG Yamal LNG
Peru LNG Darwin LNG Qatargas 3
Tangguh LNG Equatorial Guinea Angola LNG
Brass LNG Sakhalin II Pacific Rubiales
Developing the first U.S. LNG export project in 40 years
Securing the first LNG supply into new terminals in Brazil, Chile, China, Dominican Republic, E.U., India, Indonesia, Mexico, Puerto Pico, & U.S.
Negotiating some $500 Billion in LNG sales agreements
Chartering 73 LNG vessels (~20% of world fleet)
Co-Chair of industry-wide effort for the recently completed uniform LNG Master Sales Contract

3. Presenter Introduction

4. Focus and Overview of Key Topics
Common Project Structures in an LNG Export Project
Integrated Upstream Model
Merchant Model
Tolling Model
Commercial Issues Associated with N.American LNG Projects
LNG Regulatory Regime
FERC authorization
DOE Export authorization
Policy Issues
Final Remarks

5. Common Project Structures –
LNG Export Projects

6. Common Project Structures – LNG Export Projects
Three primary project structures for LNG liquefaction projects:
Integrated Upstream Model: Participants own gas supply and LNG plant, and market own LNG
Merchant Model: Project company that owns the liquefaction facility purchases natural gas from 3d party and sells LNG to offtakers
Tolling Model: LNG plant does not take title to natural gas feedstock or LNG produced at the plant, but provides liquefaction and processing services

7. Common Project Structures – Integrated Upstream Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and Loading Port
LNG Offtake
Physical Assets
Ownership
Gas Producers
LNG Buyers
Leases/ Licenses
Gas
LNG
Joint Operating Agreement(s)
LNG Sale and Purchase Agreement(s)
EPC Contracts
Joint Marketing Agreement

8. Common Project Structures – Integrated Upstream Model
Benefits:
Alignment of interest throughout value chain
May have tax and accounting benefits (may be able to use early losses from LNG plant construction to offset revenues from natural gas or liquids production)
Promotes financeability by reducing cross-default risk
Each gas supplier may control its own marketing
Risks:
Requires identical ownership of upstream and downstream assets (structuring with TrainCos can allow future trains with separate ownership)
Key Contracts: JOAs, PAA, LBA
Example: Alaska Gasline

9. Common Project Structures – Merchant Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and Loading Port
LNG Offtake
Gas Producers
LNG Buyers
EPC Contract
Gas
LNG
LNG Sale and Purchase Agreement(s)
Project Company
Gas Sales Agreement(s)
Physical Assets
Ownership
Contracts
Lease/License/
JOA

10. Common Project Structures – Merchant Model
Benefits:
Allows Project Co. to generate potentially higher returns based on value of LNG/gas price spread
Allows Project Co. sponsors greater control in sourcing gas and marketing LNG
Risks:
Project Co. assumes market and counterparty default risks both upstream and downstream
Requires Project Co. to obtain finance for plant construction based on LNG sales and project revenues
Key Contracts: SPA, GSA
Examples: Sabine Pass, Golden Pass, several BC projects

11. Common Project Structures – Tolling Model
Upstream Oil and Gas Assets
LNG Liquefaction Plant, Common Facilities, and Loading Port
LNG Offtake
Physical Assets
Ownership
Contracts
Gas Producers
LNG Buyers
Leases/ Licenses
Gas
LNG
Joint Operating Agreement(s)
LNG Sale and Purchase Agreement(s)
Tolling Company
EPC Contracts
Liquefaction Tolling Agreement(s)

12. Common Project Structures – Tolling Model
Benefits:
Avoid commodity price and marketing risks
Allows flexibility in ownership -- does not require that all upstream parties be owners of LNG plant
Reduced risk can help project financing of LNG plant, if the tolling customers have sufficient creditworthiness
Risks:
Sponsors do not profit from LNG sales
If the gas supplier (toller) is an affiliate of sponsor, security and cross-default issues can affect financing
Key Contracts: TSA, LBA
Examples: Jordan Cove, Cameron, Freeport, Cove Point, Lake Charles, Gulf Coast, Gulf LNG, Elba Island

13. Commercial Issues Associated with N. American LNG Projects

14. Commercial Issues Associated with N.American LNG Projects
Development Funding --
At risk
Consideration?
Equity
Tolling discount
Construction cost risk -- TSA signed before FID
Who takes risk of cost escalation during development? During construction? Is there risk sharing? Exit ramp?
Greater issue for greenfields than for expansions
Gas Supply
Tollers must obtain gas (SPA buyers need not)
Buy off grid, or dedicated source? (EPA issues?)

15. Commercial Issues Associated with N.American LNG Projects (con't)
Terminal Force Majeure risk
Customer continues to pay toll/fixed charge?
How long? Termination right?
Change in law or tax risk
TSA customers may bear this risk; SPA buyers rarely do
Multi-users
Inter-customer default/credit risk?
Are partial assignments permitted?
Pipeline
Who owns the pipeline, is there capacity available, and will an open season by required?

16. Commercial Issues Associated with N.American LNG Projects
Considerations upon Reconfiguring an LNG import Project as a Bi-Directional Facility
Need to navigate around existing regas customers -- literally and figuratively
Gas nominations, storage, and scheduling are more complex, less flexible
Effects on the associated pipeline to accommodate both imports and exports

17. LNG Regulatory Regime

18. Regulatory Regime Regulatory Regime Overview
Satisfying regulatory requirements may require significant investment of time and resources.
In the United States, Section 3 of the Natural Gas Act ("NGA") governs construction of export facilities and export of LNG.
Primary regulatory authority under NGA:
FERC: LNG facility siting authority.
Department of Energy ("DOE"): Approval for exports of the commodity.
Pipelines governed by Section 7 of the NGA.
FERC: Regulation of pipelines.

19. Regulatory Regime DOE Export Authorization
DOE required to authorize the export unless it finds the proposed exportation "will not be consistent with the public interest."
Exports to a country that has entered into a Free Trade Agreement ("FTA") with the United States deemed to be within the public interest.
Presently, only one license granted by DOE for LNG export to non-FTA countries.
Granted to Cheniere Energy.
16+ applications pending

20. Regulatory Regime Policy Issues
Dec. 5, 2012, DOE releases NERA study on LNG exports:
“Across all ... scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.”
Comments due Jan. 25; reply comments Feb. 24
DOE to consider first those applications for which FERC has given approval to commence pre-filing for FERC license
EPA & Sierra Club urge DOE review of upstream impacts
Both FERC and the 2d Circuit Court of Appeals have rejected similar arguments

21. Final Remarks

22. Final Remarks
Sponsors should carefully consider their risk/reward posture, and that of their investors and lenders
Select the appropriate structure; changes later can increase costs, impede marketing, and cause delays in financing
Focus on obtaining creditworthy customers -- both capital and regulatory approvals are likely to follow strong financials
Align contract terms to reflect structure, comply with licenses, and promote project commercial and financial success

23. Final Remarks Presented By: Steven R. Miles Head of LNG Practice
Baker Botts L.L.P.
1299 Pennsylvania Ave., NW
Washington, D.C