Regasified LNG: From the Regas Terminal to Market

By Mark K. Lewis and Damon R. Daniels1

The siting of regasification terminals has received the lion’s share of the attention in
discussions about bringing additional liquefied natural gas (“LNG”) into the U.S. market. Less
attention has been given to issues affecting the movement of regasified LNG to downstream
markets once a terminal starts receiving cargos. As the market access point, it is understandable
that the LNG regasification terminal is the focus of initial thinking about LNG imports.
Nonetheless, industry participants should not neglect important issues that impact the
transportation of regasified LNG from the terminal to the downstream market. Gas quality has
emerged as a major issue for downstream transportation and storage providers. But as discussed
in this article, there is a broad array of other issues downstream of the LNG terminal with the
potential to impact decisions to include regasified LNG in a supply portfolio.

In simplest terms, regasification terminals are new sources of gas to a pipeline’s system.
Like any new source of supply to the pipeline grid, the introduction of regasified LNG,
especially at a point outside of a traditional supply area, will impact gas flows and pipeline
operations. But the unique characteristics of LNG supply, such as batch-like deliveries, the
greater likelihood of supply interruptions, and the potential for gas quality concerns, and related
operational and contractual LNG-related issues warrant the attention of buyers of regasified
LNG. Inadequate attention to downstream issues can negatively impact not only the commercial
interests of the terminal developers but those of the terminal capacity holders and the
downstream buyers of regasified LNG.

Getting Regasified LNG to Market

1. Unique Infrastructure Needs

LNG terminal developers, part and parcel to developing the regasification terminal,
typically develop the pipeline facilities that are needed to connect the terminal to the interstate
grid. Depending on the terminal’s location, the pipeline facilities might consist of a relatively
short supply lateral or a relatively extensive interstate pipeline project.2 Terminal developers
typically work with directly interconnecting pipelines to address the introduction of new

1
Mr. Lewis is a partner and Mr. Daniels is an associate in the Global Projects Group of international law
firm Paul, Hastings, Janofsky & Walker LLP. Their colleague, Kirk Morgan, provided invaluable insight and
comments. Messrs. Lewis, Daniels and Morgan represent participants in various sectors of the natural gas industry,
including buyers and transporters of regasified LNG.
2
Examples from different regions in the North American pipeline grid include the Cheniere Creole Trail
Pipeline system, which will connect two Cheniere-developed LNG terminals to numerous pipeline interconnections
in the traditional onshore Louisiana supply area; the Pacific Connector Pipeline, intended to introduce regasified
LNG from the Jordan Cove project in Oregon to the interstate grid; and the Brunswick Pipeline, being developed to
connect the Canaport LNG terminal to the Maritimes and Northeast Pipeline.
supplies. This can be seen in the Maritimes and Northeast Pipeline Phase IV Expansion project,
which is supported entirely by a capacity commitment from an affiliate of the developer of the
Canaport LNG terminal in New Brunswick, Canada.

Attending to direct downstream interconnections, however, is not the end of the story. In
the case of Maritimes, for example, buyers of regasified LNG from the Canaport project need to
ensure that the pipelines downstream of Maritimes can handle gas flows to make deliveries of
Canaport gas to end users. Whether this involves changes in flow, displacement, or adjustments
that are otherwise project and contract specific, each contracting party needs to be cognizant that
these purchases involve unique issues related to the particular LNG supply source. Just as the
introduction of new supply in the Barnett Shale creates changes in flows and generates the need
for new infrastructure, the development of a new LNG terminal has ripple effects on the grid.
Commercial viability of the LNG terminal will depend, in part, on downstream operators, whose
own systems may need modifications or enhancements to accommodate the LNG supply. One
area where this concern has already been evident is gas quality. Concerns about gas quality and
gas interchangeability have been high profile at the Federal Energy Regulatory Commission and
in commercial and regulatory discussions between LNG terminal developers and interconnecting
pipelines. Early communication among the parties with responsibility for infrastructure
development allows those parties to reach out to regulators and other interested stakeholders in a
timely manner to address issues while they are manageable in a commercial context.

2. Unique Supply Issues

Whether for power generation, a large industrial consumer or a gas utility, it is important
to understand that regasified LNG is different from native natural gas in ways that affect how
parties will want to contract for regasified LNG supply. Natural gas from reservoirs, barring
unusual events, flows at a steady pace. LNG, however, shows up at a regasification terminal in
batched cargos. In the ideal world, the timing of the arrival of the next cargo would coincide
with the draw down of the liquid storage at the terminal. In reality, events at sea routinely cause
shipping delays, events at upstream gas production fields and liquefaction facilities in foreign
countries cause hiccups in the delivery of LNG cargos, and the availability of liquid storage at
the LNG terminal often is limited. Moreover, LNG suppliers may be interested in diverting
LNG cargos away from U.S. markets during periods when prices are higher in Europe, Asia or
other LNG markets. All of these issues can be addressed in contracts to purchase regasified
LNG, but the key is to address the issues upfront and to allocate obligations and risks to the party
best able to manage them. Tailoring LNG purchase and sale contracts to the realities of LNG
supply availability makes good commercial sense for any regasified LNG purchaser. For those
with state regulated retail rates, contracting to address delivery reliability and the other unique
issues associated with LNG supply may influence whether state regulators will permit LNG as
part of a regulated purchaser’s supply portfolio.

LNG purchasers need to tailor their gas supply contracts to the realities of LNG supply
dynamics with the LNG purchaser’s specific needs in mind. For example, can the LNG
purchaser manage LNG supply variability through a portfolio of transportation and storage
contracts, or does it require greater certainty of timely supply through the LNG contract or other
supply contracts? If the former is the case, an extensive transportation and storage portfolio or
separate supply options can mitigate the risks of LNG supply variability, albeit each with its own
costs. Natural gas storage can be an important hedge against LNG supply disruptions or delays.
However, the ability to rely on transportation and storage is reduced if the LNG terminal is
located away from the extensive interconnected pipeline grid and significant natural gas storage
capacity. In New England, for example, traditional gas storage facilities are limited. And the
costs, of course, must be allocated among the various stakeholders. If the LNG purchaser
requires a high level of supply certainty under the LNG contract itself, then the buyer will want
to limit, or even eliminate, any contractual right the seller might want to divert supply to more
attractive markets. Increased reliability, of course, likely comes at higher prices, so the
commercial balance must be carefully struck. These issues, among others, will determine the
extent to which the LNG purchaser can justifiably rely on regasified LNG as a primary supply
source in its portfolio.

LNG purchasers will also want to make sure that other important contractual terms are in
place. For example, if there is more than one buyer at the LNG terminal and only enough LNG
in storage to supply one customer, what are those parties’ rights to the LNG in storage? If LNG
cargos are delayed, does the answer to the preceding question depend on whose ship arrived first,
on whose ship is late, or does it depend on shipper “takes” out of the LNG terminal? Provisions
to deal with such issues are not contemplated in traditional gas supply agreements, but they must
be considered when contracting to buy regasified LNG. Accordingly, the purchaser of regasified
LNG will need to understand the applicable terminal use agreements and the rights of its supplier
at the LNG terminal.

Force majeure is another issue that must be addressed in contracts for the purchase of
regasified LNG. Who bears the risk of force majeure in the gas fields of the producing country
or at the liquefaction plant? What about force majeure on the seas? One approach that has given
gas buyers some comfort is to limit supplier force majeure to those events analogous to excused
non-performance under a traditional domestic gas purchase agreement. For example,
performance will be excused as a result of a hurricane in the Gulf of Mexico that prevents a
tanker from reaching the terminal, because that same storm likely will have also caused domestic
offshore platforms to cease production. Similarly, supplier non-performance may not be excused
as a result of political instability in Nigeria, as the typical LDC buyer of gas would not bear that
risk if it were buying gas sourced from traditional North American supply basins. Risk of gas
quality non-conformance will also have to be addressed in contracts to purchase regasified LNG.
While the standards may be set by the FERC-jurisdictional pipelines downstream of the
regasification terminal, the gas purchase agreement will have to address who bears the risk if the
gas supply fails to meet the applicable gas quality specifications and the gas is either not
accepted into the pipeline, or if it is accepted and there are consequences to the quality of the
pipeline stream.

Conclusion

Many believe that LNG will have to serve a larger role in meeting future U.S. demand for
natural gas. Whether U.S. markets can compete for global LNG supplies depends on whether
LNG purchasers in those markets can offer commercially attractive terms for that supply. The
necessary infrastructure must be in place, and to make the most out of LNG as an incremental
source of supply, market participants will have to understand and allocate the risks and
opportunities. And if domestic LNG purchasers are going to have a better chance of attracting
LNG supply, they will need a clear understanding of how their LNG supply contracts can match
their needs and those of LNG suppliers in the global market. U.S. markets already have
responded to the call for greater LNG supplies with numerous LNG terminals in various stages
of development in North America. Ultimately, as those and potentially other projects move
forward, downstream infrastructure and contracting issues warrant greater attention, especially
from domestic markets that have, in many instances, taken a wait-and-see approach.