The Economic Co-ordination Committee (ECC) of the Cabinet is expected to approve LNG Sale Purchase Agreement (SPA) between Qatargas and Pakistan State Oil (PSO) on Monday (today), well informed sources told Business Recorder. Qatargas SPA includes a funnelling mechanism to set the start date which requires the parties to agree on an increasingly precise time window during which the start date is estimated to occur in view of the side letter, and on the date on which the first of the 2015 cargo is supplied.
The contract price in US dollars/MMBTU will be a percentage of the average Brent crude oil price as quoted by the Intercontinental Exchange (ICE) of the first line ICE Brent futures contract (BRICE) for the relevant three months preceding the month of loading of the relevant cargo as already advised to the Price Negotiation Committee (PNC). The contract will be reviewed after ten years.
The details of Memorandum are as follows:
Side Letter: The side letter provides for the 2015 cargoes (ie cargoes which may be delivered in November and December 2015) and allows PSO to source those cargoes without the need to have the SBLC in place for the 2015 cargoes. However, it is important to note that even under the Side Letter the first cargo will trigger the Start Date under the SPA and PSO''s commitment to provide the SBLC for 2016 at least 30 days prior to the commencement of 2016 will be triggered and any failure to do so will be a default under the SA (notwithstanding that PSO takes delivery and pays for all cargoes of LNG in terms of the SPA).
Supply period- (a) The supply period is the period during which LNG deliveries will be undertaken ("Supply Period");( (b) the Supply Period starts on the Start Date and ends on December 31, 2030, unless: (a) there are outstanding obligations on Qatargas to deliver Make Up ING (see point 6.1(b)d. of this Memorandum), in which case the supply period is extended by a maximum of twelve months; (b) the option to extend the supply period for an additional five years (or such longer term as the parties may agree) has been exercised by mutual agreement of the parties, in which case the supply period will be as long as it has been extended for; and (c) Qatargas SPA has been terminated by either party after ten years as a result of failed price renegotiations. The price review can take place after the tenth anniversary of the start date and if it fails either Party may terminate the SPA with effect from the end of the contract Year in which the termination notice was served in which case the Supply Period could be eleven years from the start date.
Annual Quantities- Annual Contract Quantity (a) The annual contract quantity under the Qatargas SPA is: 78,000,000 MMBTU (or approximately 1.5 million metric tons per year (mtpa)) prior to contract year 2017 or contract year 2018 as the case may be and (b) 156,00,000 MMBTU (or approximately 3mtpa) from contract year 2017 (if the early ramp up right is exercised)" or contract year 2018 in any other case.
Assuming the SPA is executed this year and supplies commence under the SPA/side letter, the first contract year starts on the start date and ends on 31 December 2015 and is therefore shorter than a calendar year. The annual contract quantity during the first contract year will therefore be prorated.
Firm Option for early increase in the annual contract quantity: (a) PSO has the firm option to request the increase in the annual contract quantity to 156,000,000 MMBTU (or approximately 3mtpa)for contract Year 2017 by notifying Qatargas to this effect. Such notice must be sent no later than June 1, 2016. Such notice is irrevocable.
Excess Seller LNG: (a) Apart from the firm option to increase the annual contract quantity PS0 has an additional right to request at any time during the supply period an increase in the annual contract quantity (b) There is no limit-on the amount of increase in the annual contract quantity which PSO may request. However, PSO''s right is not a firm right but is subject to Qatargas'' acceptance or otherwise rejection of such request. Once such request has been accepted by Qatargas, the annual contract quantity will be increased to that requested level for the remainder of the supply period.
Adjusted annual contract quantities: (a) The annual contract quantity will be adjusted on an annual basis ; (b) It is PSO''s obligation to take delivery of the adjusted annual contract quantity, unless: Qatargas fails to provide the full amount of cargoes that represent the adjusted annual contract quantity and then only to that extent; or provides one or more cargoes that do not comply with the relevant specifications and PSO rejects their delivery; or one or more cargoes scheduled for delivery during that year are affected by force majeure, either on the part of PS0 or Qatargas.
The annual contract quantity may be increased by additional quantity flexibility that PS0 has the right to exercise in any contract year. There are no restrictions on the number of contract years for which annual upward flexibility quantity may be requested.
However, PS0 may only request up to 2 additional cargoes per contract year in which the annual contract quantity is below 3mtpa; and up to 3 cargoes per contract year in which the annual contract quantity has reached 3mtpa. Annual upward flexibility quantity and annual downward flexibility quantity may never be requested for the same contract year.
The annual contract quantity will be reduced by any downward flexibility that PS0 has the right to exercise in a contract year. PSO may not request annual downward flexibility quantity during the last 2 contract years. PS0 may only request a reduction in the annual contract quantity amounting to up to 2 cargoes per contract year in which the annual contract quantity is below 3mtpa; and up to 3 cargoes per contract year in which the annual contract quantity has reached 3mtpa.
The sum of all annual downward flexibility quantities in existence at any one time during the Supply Period may not exceed 4 cargoes during those contract years in which the annual contract quantity is below 3mtpa; and 6 cargoes during those contract years in which the annual contract quantity has reached 3mtpa. The concept of annual downward flexibility allows only a temporary reduction in the annual contract quantity. Reduction in one contract year must be made good by taking delivery of the corresponding quantity of LNG as soon as reasonably practicable in subsequent contract years.
Any annual downward flexibility quantity not made good by the end of the supply period will count as a failure of PSO to have taken such corresponding quantity.
The primary receiving facility for the LNG cargoes is the EETPL FSRU-based ING re-gasification terminal at Port Qasim, Karachi. PSO has the right to request Qatargas to deliver one or more LNG cargoes to alternate LNG receiving facilities within Pakistan, as long as PSO either owns, operates or otherwise has contractual rights of access to these facilities; these facilities comply with the technical parameters set out in the Qatargas SPA and are compatible with Qatargas'' LNG vessels; and these facilities are not affected by force majeure at the time of the request.
PSO''s request is subject to Qatargas'' approval, such approval not to be unreasonably withheld.
LNG cargoes will be delivered ex-ship by Qatargas on partially laden Q-flex vessels. However, in view of certain port constraints until the parties agree otherwise, smaller "conventional vessels" will be used. In the meanwhile the parties are to make good faith efforts to resolve the issue. After Q-Flex acceptance, if necessary, supply during monsoon months will continue to be through conventional vessels.
The target date for resolution of such issues is March 31, 2016 and if the Q-Flex issues are not fully resolved by that date there is to be a meeting between the parties. As the cargoes will be delivered ex-ship Port Qasim/Pakistan, Qatargas is responsible to pay the relevant port charges at Port Qasim, however, the amount of port charges Qatargas has agreed to pay at Port Qasim are capped at $320,000.00 per calling.
If PS0 informs Qatargas between 15 October and 15 November in a contract year that PSO will be unable to take delivery of a cargo in the following contract year, then Qatargas will use reasonable endeavours to sell the cargo elsewhere. PSO will then only be liable to pay to Qatargas the difference between the value of the relevant cargo that PSO would have had to pay to Qatargas had PS0 taken that cargo; and the amount for which Qatargas was able to sell the cargo in the market minus the difference between the costs Qatargas incurred because it had to find another buyer and the costs that Qatargas would have incurred in selling and delivering the cargo to PSO and no makeup LNG will be available.
If the net proceeds exceed the amount PSO would have had to pay for the cargo, then Qatargas may keep that difference.
If PSO informs Qatargas after 15 November in a contract year that PSO will be unable to take delivery of a cargo in the following contract year, then, in the first instance, the parties will try to reschedule delivery of the cargo. PSO may also exercise its right to divert the cargo to another receiving terminal within Pakistan, subject to further terminal(s) having been constructed and meeting the requirements set out in the SPA. If the parties were unable to reschedule or divert the cargo as described above, then PS0 will be liable to pay for such cargo. However, PSO then has the right to request delivery of the LNG quantities it has already paid for at a later stage. Any upward cost differential will have to be made by PSO.
PSO may request the makeup LNG to be delivered within the same contract year in which PSO failed to take delivery of the relevant cargo. This effectively amounts to a rescheduling of the cargo. In this case, Qatargas will decide in its sole discretion whether its other scheduled deliveries allow such a rescheduling of PSO''s cargo. PSO may request the makeup LNG to be delivered during following contract years, including during an additional 12-month period after expiry of the supply period: If PSO requests make up LNG before 15 October in the year before delivery is requested (that is, when no delivery schedules have been set and Qatargas has full flexibility to schedule quantities), then Qatargas has to comply with this request.
" If PSO requests make up LNG after October 15, then Qatargas will in good faith review the request but may at its sole discretion decide whether or not it can oblige, stipulates the agreement.
Depending on when PSO requests make up LNG to be delivered, there may be an increase in price applicable to such make up LNG and PSO has to pay for such increase at the time of delivery. PSO will not get the benefit of any downward price differential.
However, If Qatargas discovers that LNG to be delivered under the Qatargas SPA does not comply with the relevant quality specifications set out in the Qatargas SPA, then Qatargas has to inform PSO of this failure to comply and PSO has the right to reject such LNG, after first having used reasonable endeavours to accept it; or accept such LNG. If PS0 decides to reject the LNG, Qatargas will be deemed to have failed to deliver the relevant cargo. If PSO had a chance to evaluate the situation and decided to accept LNG that fails to comply with the relevant quality specifications, then PSO may recover from Qatargas all reasonable costs incurred by PSO, or billed by one or both of the gas utilities, as a result of such failure. The amount PS0 may recover is capped at 20% of the value of the relevant cargo.
If the parties only realise that the LNG fails to comply with the relevant quality specifications when PSO is already receiving or has already received LNG, then PSO may recover from Qatargas all reasonable costs or other losses incurred by PSO, or billed by one or both of the gas utilities, as a result of having received such LNG or having to treat or dispose of it. The amount PSO may recover in this scenario is capped at 25% of the value of the relevant cargo. Any LNG not yet delivered may be rejected by PSO as set out in the memorandum.
"If Qatargas is prevented from making timely delivery of a cargo for technical or operational reasons, then, in the first instance, PSO and Qatargas will try to reschedule the relevant cargo. If the parties fail to reschedule the cargo, Qatargas is liable to PSO for any loss, damage or costs incurred by PSO, or billed by one or both of the gas utilities due to Qatargas'' failure to make timely delivery of such cargo. Qatargas'' liability is capped at 20% of the value of such cargo," the agreement further added.
The LNG vessel shall be capable of discharging a full cargo of LNG with 16.75 hours provided such rates does not exceed the maximum safe design unloading rate of the nominated terminal and that cargo is discharged through a minimum liquid arms, with back pressure at ships rail after strainers (60 mesh) not exceeding 400 kPa gauge and provided that the receiving terminal is capable of providing adequate return vapour to allow the LNG vessel to discharge at a maximum rate consistent with the maximum safe design unloading rate of the nominated terminal.
The import of LNG will be supplied on provision of Standby Letter of Credit (SBLC) at least within 15 days prior to the loading date of the first cargo which shall be payable in the event of default and which shall be renowned annually at least 30 days prior to each contract year.
The side letter which will also be approved by the ECC says " pursuant to the SPA the buyer is required to provide a SBLC in order to secure its payment obligations to the seller. Due to the buyer''s potential inability to provide a SBLC in respect of some or all cargos scheduled for delivery during 2015( during the first contract year, the seller agrees to waive the requirement for the buyer to provide a SBLC of credit in respect to each 2015 cargo provided that the buyer pre-pays for the relevant 2015 cargo . Such waiver shall be effective on and from the date and time that the pre-shipment is received into seller''s bank account for the first 2015 cargo and shall remain in place for the remaining 2015 cargoes subject to buyer making payment for such 2015 cargoes".
The side letter further says" the buyer shall procure that the pre-shipment of 105 per cent of the value of the relevant 2015 cargo is made and is received into seller''s bank account no later than three banking days prior to the schedule loading date of the relevant 2015 cargo. For the purposes of the pre-payment, the seller shall send the buyer a pre-shipment invoice as far in advance of the scheduled loading date as is reasonably possible and the value of the relevant cargo shall be calculated as the standard cargo content multiplied by the contract price.
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