In the last few weeks, I have had the opportunity of debating with a number of energy law practitioners, terms, sellers and offtakers regard as important and would want their lawyers to negotiate for them in Gas Sale and Purchase Agreements (GSPAs). I would therefore, this week, like to share some of my findings with the readers of this column.
A GSPA is an agreement for the sale and purchase of gas, typically dry gas and may also be referred to as a Gas Sale Agreement. In Nigeria, the template GSPA for the Nigerian gas to power policy is referred to as a Gas Sale and Aggregation Agreement (GSAA). This Agreement is referred to as a GSAA because it involves a gas aggregator (the Gas Aggregation Company of Nigeria) which supposedly acts as a one stop intermediary point between the suppliers and the diverse demand sectors.
Key Negotiable Terms in the GSPA:
The key negotiable terms in a GSPA vary and the counter-parties have different interests, as far as these contractual terms are concerned. Some of these terms include Shortfall Gas, Make-up Gas, Make Good Gas, Take or Pay, Gas Specification, Force Majeure, Carry Forward Gas, provisions relating to the Delivery Point amongst others. This paper reviews a few of these provisions.
Shortfall Gas:
In very simple terms, shortfall gas is gas supplied by a seller which is lesser than the quantity nominated by the buyer and which the buyer is entitled to nominate pursuant to the terms of the GSPA. In this regard, the buyer would want to negotiate a discounted shortfall gas price when the under-supplied quantity is finally supplied. In the alternative, the buyer may want the seller to be liable to pay for alternative fuel sourced by buyer or pay financial compensation to her.
On the part of the seller, it would want to negotiate very negligible discount if at all, the seller is amenable to a discounted shortfall. Additionally, the seller may also want a cap on the price to be payable where alternative fuel is to sourced by the buyer. At times, the seller might want the price of the alternative fuel indexed to the price of an alternative like low pour fuel oil (“LPFO”).
Gas Specification
The general rule is that the gas must conform to a contract specification. Where this is not the case, the buyer would negotiate a right to reject the gas or take at a discounted price. Where the gas is rejected, it may then be regarded as shortfall gas. On its part, the seller would want a situation where there is a threshold within which, the buyer would still accept the gas and in any case, the seller would like to negotiate a situation where, once the gas is accepted, the full contract price is payable by the buyer.
Force Majeure:
A force majeure also referred to as an FM, is an act typically beyond the control of the parties, which excuses them from any legal responsibility or liability. Depending on the circumstances one party is likely to prefer a broader scope whilst the other may want the scope of FM narrowed down. Other issues such as whether only general strikes would fall within the purview of a force majeure or whether force majeure should include every strike? A typical question in negotiating a force majeure is what happens where there is a strike induced by obviously bad management decision or where a party mischievously induces a strike to excuse itself from liability under the contract.
Take or Pay:
A very important term in most offtake contracts, including GSPAs, is the take or pay (ToP) provision which obliges a buyer to take or pay for, if not taken, a pre-determined quantity of gas. For the seller, this is to ensure a regular source of income, usually for repayment of loans and to meet other obligations so even if a buyer does not take the gas, it pays for it.
Make Up Gas:
This is closely related to the ToP. The situation is such that upon making payment under a ToP without taking the gas, the buyer then becomes entitled to that quantity of gas already paid for, but not taken. This is because that untaken quantity, goes into a make-up bank. If at some point in a future year, it has taken the Take or Pay Amount for that year before the year end, he can then start to take gas free up to the amount of the Make-up outstanding.
Whereas the buyer wants to take the gas free later in the life of the contract, the seller wants a situation where the buyer pays the difference between what was paid earlier and the prevailing gas prices (this only makes sense when there is an increase and not decrease in price).
Conclusion:
This is by no means, an exhaustive piece on those issues that parties to any GSPA by whatever nomenclature. However it raises some of the issues which the discerning negotiator or lawyer should critically consider when negotiating GSPAs for clients. Very importantly, persons negotiating on behalf of a buyer in particular must take into consideration the buyer’s obligations under other downstream agreements, if any and help avoid a mis-match.
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