COMMON LNG DISPUTES – WILL VIETNAMESE IMPORTERS FACE THE SAME LEGAL RISK?

COMMON LNG DISPUTES – WILL VIETNAMESE IMPORTERS FACE THE SAME LEGAL RISK?

On the 11th February 2020, Resolution No. 55/NQ-TW on National energy development of Vietnam was issued. Accordingly, the State set out its requirement to develop the gas-fired electricity using LNG, prioritizing investment in technical infrastructure serving the import and consumption of LNG. Adopting a new power supply source will be challenging not just in the technical aspect but also in the legal part. In the light of such situation, this short Article aims to discuss the potential disputes related to the importation of LNG to Vietnam.

Types of LNG disputes

In this Article, 3 types of LNG disputes are considered. These disputes are among the most common and became even more visible in 2020 because of the corona virus disease (“Covid-19”).

Price dispute

The first one is price dispute. This happens in situation where LNG spot price is significantly lower than those in long-term contracts, buyers would then trigger the price review provision to mitigate their loss. On the other hand, sellers would demand raise the contract price under the same provision if spot prices appeared much more profitable.

An example can be seen in the ICC case between the Italian energy utility Edison (“Edison”) and Qatari company Rasgas (“Rasgas”). The fact was that Edison signed a 25-year long-term contract to purchase LNG from Rasgas at the price indexed to oil price. Subsequently, Edison would resell the gas from LNG to its consumers. However, when oil prices increased, the spot market gas prices went the opposite direction. As a result, Edison must sell gas to its customer at a loss and it had to refer this matter to ICC to adjust the LNG price under the long-term contract. According to Global Arbitration Review, Edison was awarded in its favor.

These disputes are among the most common and became even more visible in 2020 because of the corona virus disease (“Covid-19”).
These disputes are among the most common and became even more visible in 2020 because of the corona virus disease (“Covid-19”).

Force majeure dispute

The second type of disputes are those that relate to claims of force majeure event. In 2020, China National Offshore Oil Corporation (“CNOOC”) as the LNG importer declared force majeure because the Chinese government imposes quarantines and travel restrictions. In contrast, the major suppliers such as Total and Shell rejected such declaration. Similar cases took place in India where Indian LNG importers had to issue force majeure notice as there was a national wide lockdown which heavily affected the domestic gas demand and port operations. Further information are rather limited but it is possible to argue that disputes may arise from such incident.

Under Delivery

Thirdly, the disputes related to Under Delivery. According to the Special Issue on “Changing LNG Market and Contracts” of OGEL,[5] this type of dispute happens when seller of a long-term contract purposely fails to deliver a quantity of LNG and sell such quantity in the spot market at a more profitable price. Knowing such intention of sellers, buyers might not be happy with the compensation they get from the provisions of the long-term contract. Instead, buyers would seek maximum damages through Arbitration.   

Risk of encountering such disputes for Vietnamese LNG importers

In the LNG market, Vietnam is still a new buyer and it can only be predicted at this point if the above-mentioned disputes are likely to occur to Vietnamese importers.

Current status of LNG importation

Currently, the main purpose of importing LNG has been to fuel the thermal power plants such as the Quang Ninh LNG power plant[1], Son My 1 & 2 Power plant[2]  and the Nhon Trach 3 and 4 power plant.[3] Based on the information available on PetroTimes,[4] the public learned that PetroVietnam Gas Joint Stock Corporation (“PV GAS”) has been working on LNG supply by signing several LNG Master Sales Agreements (“MSA”). In order to determine the risk of having a price dispute between PV GAS and the LNG suppliers, it is important to understand how LNG (or natural gas from such LNG) is priced under the contract between PV GAS and its consumer (the LNG power plants). However, the price clauses in such contracts are unlikely to be made public and therefore, this Article will only assume that LNG (or natural gas) being sold by PV GAS to its consumer is calculated based on the price of LNG at which PV GAS purchases from LNG suppliers (“Imported LNG price”).

Should this be the case, PV GAS (or any LNG importer who supply LNG to LNG power plant) should not suffer any loss which is similar to Edison’s case examined in Section I above. Regardless of how the Imported LNG price fluctuates, PV GAS can charge its consumer at a profitable price.

Furthermore, in MSAs, LNG is only sold through spot sales, meaning buyers do not take commitment to purchase a fixed quantity of LNG a year. Therefore, even if Vietnamese importers suffer losses from Imported LNG price, it would be a one-off case and much less severe than those that we see from a long-term contract.

LNG is only sold through spot sales, meaning buyers do not take commitment to purchase a fixed quantity of LNG a year.
LNG is only sold through spot sales, meaning buyers do not take commitment to purchase a fixed quantity of LNG a year.

Force majeure

In term of force majeure, a force majeure clause is rather universal and focuses on two elements: (1) an event beyond the control of the parties and (2) the event prevents a party from performing its obligation despite that party’s best effort to remedy the situation. There should be no major difference between a MSA and a long-term contract. The question is whether government’s order to restrict port operation can be a valid force majeure event for Vietnamese importers. The Vietnamese importers’ ability to perform their obligation under MSAs will be heavily dependent on the functioning of a very limited number of LNG receiving terminals. It is expected that the Thi Vai LNG and My Son LNG terminals will be available in the next few years.[5] In the performance of the relevant MSAs, if there is any interruption to these two terminals, Vietnamese importer would not have reasonable alternatives at hand and could, theoretically, use it as a ground to declare force majeure event.

Nevertheless, the importers must still be advised that force majeure is a very complicated matter to prove. There are other factors to constitute a valid force majeure event, such as duration of the event or notice of the affected party.

For the last risk on seller’s under delivery, it should be less likely to occur to Vietnamese importers as long as LNG is still purchased through MSA and spot sales. Each spot sale will have its own price or pricing method, which is negotiated and agreed upon by buyer and seller when they execute such sale. Parties’ commitments in this case are far less substantial and they will be better protected against a fluctuating market compared to the parties of a long-term contract.  

Vietnamese LNG importers are still in a “trial period” which is a relatively safe position in comparison to the major LNG buyers in the World.
Vietnamese LNG importers are still in a “trial period” which is a relatively safe position in comparison to the major LNG buyers in the World.

Conclude

As discussed above and strictly speaking about the above-mentioned disputes, Vietnamese LNG importers are still in a “trial period” which is a relatively safe position in comparison to the major LNG buyers in the World. However, after the expiration of the MSAs, it can be anticipated that Vietnamese LNG importers will eventually turn to long-term LNG contracts with considerably higher risk involved. Therefore, learning from the MSAs, understanding the world’s practice and having a well drafted contract will be crucial for Vietnamese importers.

Manh Pham – Associate 

 

 

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