The Implications Of The Houthi Rebels` Attacks In The Red Sea On The LNG Exports From The Middle East To Europe
The missile attacks by the Yemen`s Houthi rebel group on the cargo ships passing through the Bab el-Mandeb Strait and the Southern Red Sea have forced the LNG suppliers from the Middle East, QatarEnergy LNG and Abu Dhabi National Oil Company, to use an alternative route for the transportation of LNG via the Cape of Good Hope.
The use of the alternative route will extend considerably the time spent by the LNG carriers on the laden and ballast voyages which in turn will affect the delivery schedules at the European LNG terminals. In the Ex Ship sale contracts, any circumstances relating to the transportation of the LNG which affect the ability of the seller to deliver the LNG cargoes at the receiving terminal during the scheduled periods such as acts of war (whether declared or undeclared), hostilities, acts of piracy or the acts of terrorists1, represent an event of Force Majeure.
The Ex Ship sale contract forms provide that if the seller`s obligation to deliver the LNG cargoes during the scheduled periods is prevented or delayed by an occurrence of an event of Force Majeure, the seller may claim Force Majeure by giving notice of such Force Majeure to the buyer.
The Force Majeure notice should include the information available about the circumstances (i.e. the security risks in the Southern Red Sea) and a statement of the steps and time believed necessary to remedy the event or circumstances of Force Majeure2 (i.e. the alternative route and the time necessary to transport the LNG via the alternative route).
The contracting parties will have to re-schedule the delivery of the LNG cargoes and agree on a new date and time for berthing the vessel(s) on the route to the receiving terminal. Then after taking into consideration the time spent by the LNG carriers on the laden and ballast voyages, the sellers can propose to buyers a revision of the scheduled unloading windows for the LNG cargoes to be delivered from now on.
Re-scheduling of the current deliveries (the LNG cargoes on the route to the receiving terminals) will cause additional operational costs for both the sellers and buyers. The buyers will incur extra costs for the regasification terminal capacity not used and for the re-liquefaction of the boil-off gas generated by the LNG in the storage tanks during the additional period spent by the LNG carriers on the laden voyage(s). In this regard, the Force Majeure clause of the long-term Ex-Ship Sales Agreements provides that in the event that the seller`s obligation to deliver the LNG cargoes is delayed by an occurrence of an event of Force Majeure, the seller shall be relieved from liability and shall not be liable to the buyer for any loss incurred due to delay in delivery3.
If the use of the alternative maritime route via the Cape of Good Hope will be necessary for a longer period, then it will be necessary to re-schedule not only the cargoes on the route and the cargoes to be delivered in February and March, but the entire Annual Delivery Program.
Who Bears The Additional Transportation Costs
The use of the alternative maritime route via the Cape of Good Hope will extend considerably the voyage distance and time from the Middle East to Europe.
On the original route via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal, the Q-Max and Q-Flex LNG carriers used by QatarEnergy could have transported the LNG cargoes from Ras Laffan LNG Terminal, in Qatar to South Hook LNG Terminal in United Kingdom on approximately 18 days.
On the alternative maritime route via the Cape of Good Hope, the LNG carriers have to sail over a distance of 10,824 nautical miles. At a speed of 14 knots, the time necessary to perform such voyage would be 32 days.
In the case of the LNG cargoes which have to be delivered by QatarEnergy to Adriatic LNG Terminal, the things are much worst.
On the original route via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal, the Q-Max and Q-Flex LNG carriers used by QatarEnergy had to transport the LNG cargoes from Ras Laffan LNG Terminal, in Qatar to Adriatic LNG LNG Terminal in Italy over a distance of 4,438 nautical miles. At a speed of 14 knots, the time necessary to perform such voyage was approximately 13 days.
On the alternative maritime route via the Cape of Good Hope, the LNG carriers have to sail over a distance of 11,669 nautical miles. At a speed of 14 knots, the time necessary to perform such voyage would be 34 days and 18 hours.
The LNG deliveries by Abu Dhabi National Oil Company to the Elbehafen floating LNG terminal in Brunsbüttel, Germany would also be affected.
On the original route via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal, the LNG cargoes were transported from Das Island LNG Terminal to the Elbehafen floating LNG terminal in Brunsbüttel over a distance of 6,493 nautical miles. At a speed of 14 knots, the time necessary to perform such voyage was approximately 19 days and 8 hours.
On the alternative maritime route via the Cape of Good Hope, the LNG carriers have to sail over a distance of 11,226 nautical miles. At a speed of 14 knots, the time necessary to perform such voyage would be 33 days and 10 hours.
The use of the alternative maritime route via the Cape of Good Hope will increase the bunker fuel consumption of the LNG carriers on both the laden and ballast voyages. As a result, in the case of LNG carriers operated under time charters that use the boil-off gas as fuel, the charterers might have to reconsider which type of fuel can be used.
In LNG time charterparties for these types of LNG carriers, the fuel consumption is calculated taking into consideration not only the fuel oil and marine diesel oil consumption but also the LNG cargo loss through boil-off.
ShellLNGTime 1 (Shell LNG Time Charter Party form) provides that for the purpose of calculation of the fuel consumption for a voyage, the term "fuel" is used to refer to its two components, the fuel oil and boil-off gas, measured in metric tonnes of Fuel Oil Equivalent. The Clause 6(a) of Appendix C of ShellLNGTime 1 has the following provisions:
"The actual fuel consumption on a Voyage shall [...] be the sum of,
(i) the fuel oil consumed during the Voyage (expressed in tonnes) [...]; and
(ii) the fuel equivalent of the total volume of cargo lost as Boil-Off during the Voyage (expressed in tonnes of Fuel Oil Equivalent) […]."
It is obvious that the amount of boil-off gas generated by the LNG cargoes on the alternative maritime route via the Cape of Good Hope will exceed the Boil-Off Cap stated in charterparties based on the voyage time on the original route via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal. In charterparties, the excess boil-off consumed on the alternative route shall be for the charterers` account. The Clause 23 paragraph (b) of BIMCO GIIGNL LNGVOY (BIMCO and GIIGNL LNG Voyage Charter Party form) stipulates expressly that the excess boil-off lost in the event of delays occurred due to war risks shall not count towards the Boil-Off Cap and therefore, the shipowners shall have no responsibility to compensate the charterers for the use of such excess boil-off gas as propulsive fuel.
Furthermore, BIMCO War Risks Clause 2013 paragraph (d), which is incorporated in BIMCO GIIGNL LNGVOY, has the following provisions:
"If at any stage of the voyage after the loading of the cargo commences, it appears that, in the reasonable judgement of the Master and/or the Owners, the Vessel, cargo, crew or other persons on board the Vessel may be exposed to War Risks on any part of the route (including any canal or waterway) which is normally and customarily used in a voyage of the nature contracted for, and there is another longer route to the Discharging Port, the Owners shall give notice to the Charterers that this route will be taken. In this event the Owners shall be entitled, if the total extra distance exceeds 100 miles, to additional freight which shall be the same percentage of the freight contracted for as the percentage which the extra distance represents to the distance of the normal and customary route."
In the spot sales, the LNG suppliers and traders who deliver the LNG cargoes on Ex Ship basis at receiving terminals could recover the extra expenses from the buyers after delivery, by including the additional transportation costs in the invoice sent to the buyers.
In the case of LNG cargoes delivered on Ex Ship basis under long-term sales contracts, the contract price formula is based on the costs of transportation via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal. For the time being, QatarEnergy LNG and Abu Dhabi National Oil Company may have to bear the additional transportation costs but if the situation in the Southern Red Sea will persist in the future, they can request a revision of the existing price formula which is based on the costs of transportation via the Bab el-Mandeb Strait, the Red Sea and the Suez Canal.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Gas Trade Review Edition No. 3.
Endnotes:
1. In QatarEnergy LNG contracts, such events of Force Majeure are referred to as "Adverse Security and Safety Conditions" and defined as security and safety risks which prevent an LNG vessel from proceeding on the usual route due to the prevailing security conditions.
2. See GIIGNL Master Ex-Ship LNG Sales Agreement form.
3. See BP Standard Form MSA (DES) 2019 Edition.