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The Government’s intention to facilitate the importation of liquified natural gas (LNG) as part of its solution to the energy crisis will require the development of a new LNG-specific regulatory framework. We look at some of the implications.
Regulation required
The first requirement will be to fast forward the construction of LNG facilities. Our understanding is that this will be achieved by legislating resource consents for terminal construction – whether onshore at port or offshore with the LNG piped in.
This will raise the question of who will fund, own and operate the facilities. It would make sense for the gas industry to collaborate on the solution and share infrastructure, but this may require the involvement of the Commerce Commission or permissive legislation.
There is precedent for such an arrangement in the form of Liquigas – a shared LPG infrastructure provider owned by participants in the LPG market and governed in accordance with pricing arrangements agreed with the Commerce Commission through a settlement in 2003.
In due course, technical amendments may also be required to accommodate LNG as a “Gas” under the Gas Act 1991. This could be delivered through an Order in Council by the Governor-General, either as an interim step or otherwise.
Preparing for LNG supply agreements
While most buyers will be familiar with the core concepts underpinning a gas supply agreement, the prospect of importing LNG brings with it a raft of additional considerations — from procurement and shipping to regasification and distribution.
- Specification
It will be important to ensure that the LNG meets the specification/quality standards for injection into the gas transmission network, particularly where the LNG is from fields unknown to New Zealand.
Buyers will want to ensure that supply agreement clearly defines these specifications, including penalties or remedies if an agreed specification is not met; methods for measuring and testing the composition and quality of the LNG; and a regime for acceptance or rejection of off-spec LNG.
- Shipping and delivery terms
As LNG will be shipped to New Zealand, the relevant shipping terms will bear significant importance for New Zealand buyers. The two most common are:
- FOB (Free on Board) - buyers assume responsibility for the LNG once it is loaded onto the vessel at the port of origin. This provides greater control over shipping logistics but also means the buyer is responsible for arranging, coordinating and paying for transport.
- DAP (Delivered at Place) - the responsibility for shipping logistics is on the seller until the LNG reaches the New Zealand port. This has the advantage of simplifying the buyer’s role but at the cost of limiting the buyer's control over the transportation process.
- Shipping risks and insurance
Adequate insurance coverage through the shipping process will be crucial given the long distances involved and potential exposure to risks such as weather events, rough seas or delays due to port congestion. Buyers should also consider the reliability and capacity of New Zealand ports, ensuring that they can handle the size and frequency of LNG shipments.
- Demurrage and laytime
Laytime is the allocated period for loading and unloading the LNG cargo. Buyers should put care into understanding and negotiating laytime requirements as overestimating them can lead to increased costs, while underestimating them can result in costly demurrage charges (the penalty incurred when a vessel is delayed beyond the agreed laytime).
It is important to understand when demurrage begins and ends, and to ensure relevant exceptions are in place for force majeure events.
- Destination flexibility
The ability to divert LNG cargoes to alternative destinations may be relevant for New Zealand buyers, particularly if demand is likely to fluctuate. This will however depend on the port infrastructure and the capacity to receive LNG at different ports – something that is yet to be established.
- Regasification considerations
In order to be used in New Zealand’s gas infrastructure, LNG will need to be regasified including specific considerations as to the type and nature of the regasification infrastructure – particularly in respect of maximum volumes. The cost of converting LNG back into gas should also be factored into the overall economics of the LNG supply agreement.
- Take-or-Pay and Make-up Rights
Similar to standard Gas Supply Agreements, LNG Supply Agreements commonly include take-or-pay and make up rights.
- Take-or-Pay Clauses require the buyer to pay for a specified volume of LNG, whether or not it is taken.
- Make-up Rights provide a mechanism for buyers to recover LNG volumes that were paid for but not delivered, typically allowing the delivery to occur in future periods.
- Hardship clauses and force majeure
- Hardship clauses allow for renegotiation of contract terms if extraordinary events significantly alter the economic balance of the contract – e.g., significant shifts in shipping costs, regulatory changes affecting transportation routes, or disruptions in global LNG supply chains.
- Force majeure clauses excuse a party from fulfilling contractual obligations due to unforeseen events beyond their control, such as natural disasters, geopolitical disruptions, or major shipping incidents.
Force Majeure clauses for LNG supply agreements will need to be carefully reviewed to ensure they are fit for purpose and include all relevant circumstances (including those linked to shipping). Where possible, arrangements with the ports and regasification facilities should go back-to-back with the force majeure regime – particularly in the context of demurrage and other delays.
Chapman Tripp well-placed to help
Chapman Tripp is well placed to advise on the emergence of LNG supply agreements in New Zealand as partner and head of the firm’s energy team Lauren Curtayne has direct and deep experience in this area, acquired when working overseas.
I am optimistic about the role LNG can play in securing reliable energy in New Zealand. I look forward to drawing on my expertise to support this chapter of the NZ energy transitionLauren Curtayne
See our recent publication for a description of the rest of the energy reform package.
