In contrast to joint venture issues relating to upstream oil and gas development, the topic of shareholders' agreements for Liquefied Natural Gas (LNG) liquefaction projects has not been covered to a similar extent in existing industry literature. Although there are common issues raised by all shareholder agreements, the midstream LNG project is an integral part of the LNG value train and it is worth considering the specific set of issues and considerations arising in relation to the shareholder agreement for the party responsible for owning and operating such processing facilities.
Tolling and Buy-sell structures
Generally speaking, midstream LNG projects reflect two different models of LNG processing arrangements, namely, (a) a tolling model where the project company processes natural gas into LNG on behalf of the upstream resource owners, and (b) a buy-sell model where the project company purchases the natural gas and sells the resulting LNG produced from its liquefaction facilities. Under a buy-sell model, the shareholders' agreement for the midstream facilities will address the requirements for the board's and/or shareholders' approvals for the gas supply agreements as well as LNG marketing and disposition arrangements. As for a tolling model, the shareholders' agreement will address similar approval issues but only in relation to the LNG tolling agreements. In either case, the shareholders' agreement may reflect that the execution of the definitive gas supply agreements, LNG sales agreements and LNG tolling agreements, is required for the taking of a final investment decision (FID) to proceed with the construction and development of the LNG midstream project.
Number of Trains and Expansions
Whether the project company is structured for the ownership and operation of a single train or multiple trains will affect the provisions of the shareholders' agreement. In particular, the provisions relating to FID and the financing obligations and approvals will be worded differently if the project company is intended to own and operate multiple trains as opposed to only a single train. Thus, the parties will need to consider if the shareholders' agreement should include provisions for expansion of train facilities beyond the initial train(s). If so, the shareholders' agreement should address the approval requirements for such expansion, and the shareholder's rights and obligations in respect of an approved expansion. For instance, the shareholders' agreement may provide that such expansions require unanimous or at least supermajority shareholder or board approval, with an option for the non-approving shareholder(s) to withdraw from participation of the LNG project.
Other Issues: Financing, Work Programs and Budgets, and Withdrawal Rights
Apart from the issues discussed above, other issues relating to midstream shareholders' agreements include the following:
The shareholders' agreement will have to address the financing considerations for the LNG project facilities, for instance, the required funding obligations on the part of shareholders, such as an obligation to maximise debt financing on limited recourse terms and to furnish pro-rata to their shareholding any deficits in third party lender financing.
Work Programs and Budgets
The work programs and budgets can typically be characterized according to the stage of the LNG project development, namely, the pre-construction, construction, and operation phases. The shareholders' agreement will have to address, amongst other things, what should be the appropriate levels of shareholder and board approvals for the work programs and budgets for each such stage and any subsequent revision thereof, the funding obligations arising in connection with the approval of the work programs and budgets, and the consequences of non-approval (e.g., whether there is default funding arrangement in absence of an approved budget).
LNG Sales and Marketing
If a buy-sell model is adopted for the midstream LNG project, a key set of the shareholder provisions will relate to the sales and marketing of LNG. In this respect, the final form of the LNG sales and purchase agreements may have to be approved by the board and/or shareholders, or in certain instances, comply with key provisions for such sales as set out in the shareholders' agreement. In particular where the proposed buyer is another shareholder's affiliate, there may be provisions in the shareholders' agreement to require that the sale terms are at arms' length, unless the sale is to a related marketing entity and the benefits from any on-sales by such entity are shared among the midstream shareholders. Separately, it should be noted that the durations of the shareholders' agreement and the feed gas supply agreement should not be shorter than that of the proposed LNG sales and purchase agreements.
The shareholders' agreement may provide for voluntary withdrawal rights exercisable by non-defaulting shareholders in certain situations, for instance, a failure to take FID or a negative vote to proceed to the construction phase. In this respect, the shareholders' agreement will have to address the circumstances in which such withdrawal rights are exercisable and the reimbursement, if any, which should be received by the withdrawing shareholder in respect of its capital contributions, which may be at a fair market value or at an agreed discount.
The preceding discussion is only intended to set out a broad outline of the potential issues and shareholder concerns. Given the high capital costs of liquefaction facilities, their long production life and their importance to the entire LNG project, the shareholders would be well-advised to consider and address in their shareholder's agreement all key issues in connection with the development of such facilities.