Setting The Commercial Operations Date In LNG Offtake Contracts

The commercial operations date is the first day when an LNG project shall be considered capable to deliver LNG in sufficient quantities and necessary quality to allow the project company to perform all of its obligations under the offtake contracts.
The LNG offtake contracts concluded for greenfield projects such as Calcasieu Pass do not stipulate a commercial operations date because such date cannot be known or even determined accurately at the time such contracts are agreed. Instead, the LNG offtake contracts require sellers to notify within specified timeframes increasingly narrow window periods during which the LNG project is expected to become commercially operable.
The first window period is set in function of the conditions precedent fulfillment date¹, particularly the date when the project company issues to the EPC contractor the final notice to proceed for the construction of the LNG facility, and the expected duration of the EPC contract for the LNG facility, taking into consideration not only the time necessary to perform the engineering, procurement and construction works, but also the time required for the commissioning of the LNG facility.
The contractual deadlines for the notification of the narrowed window periods are set based on the milestones in the project construction schedule.
At the first contractual deadline, the seller has to narrow down the first window period to a 270 days` period, which is the second window period.
At the second contractual deadline, the seller has to narrow down the second window period to a 180 days` period, which is the third window period.
At the third contractual deadline, the seller has to narrow down the third window period to a 90 days` period, which is the fourth window period.
At the fourth contractual deadline, the seller has to narrow down the fourth window period to a 60 days` period, which is the fifth window period.
Ultimately, the seller has to narrow down the fifth window period to a 30 days` period, which is the final window period, and subsequently, it has to communicate to buyer the commercial operations date, i.e. the date when the LNG project is expected to become operational.
At each contractual deadline, the seller shall notify a window period based on the information available at the time.
Unforeseen delays could occur. It is not uncommon for the unproven new technology to cause delays to the construction completion or commissioning of the LNG facility, but not on the scale that occurred in the case of the Calcasieu Pass Project.
The breakdown and/or the necessity to make repairs or alterations to any of the equipments of the LNG facility can constitute an event of force majeure only if it is so stipulated in the offtake contracts.
It is necessary to stipulate expressly in the offtake contracts which events can be considered force majeure events and which events will not constitute force majeure events.
If the breakdown and/or the necessity to make repairs or alterations to any of the equipments of the LNG facility is specified as a force majeure event in the offtake contracts and such event occurs and delays the commissioning of the LNG facility, each mentioned window period and the commercial operations date may be deferred, but not indefinitely. If the seller (project company) declares force majeure during the project construction and/or commissioning and thereby the window periods are extended, the extended period cannot exceed the contractually specified time period, usually not more than 24 months. If the seller fails to notify buyer the commercial operations date by the end of such period, the buyer may terminate the offtake contract.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Gas Trade Review Edition No. 6.

Endnotes:

1. The offtake contracts concluded by the LNG project developers as sellers with the project offtakers shall not become effective until the satisfaction or waiver of conditions precedent, such as the LNG project developer receiving the necessary authorizations for the construction and operation of the LNG project, the LNG project developer making a final investment decision for the project based on the financing commitments provided by the lenders, and the issuance by the LNG project developer of the final notice to the EPC contractor to proceed for the construction of the LNG facility. The date when the last of the conditions precedent is satisfied is referred to as the "conditions precedent fulfillment date".