Despite recent fluctuations in the European gas markets, we have seen an increased interest among lenders in taking security over gas in storage, or over rights to gas in storage. This article explains the key issues for lenders to take into account when doing so.
Gas is held in specially designed storage facilities, and access to these facilities is made possible through the use of umbrella gas storage agreements between the gas storage provider and its customers (i.e. a potential borrower under a bank financing). The storage agreement will entitle the customer to hold space in the facility, and to inject and withdraw specified volumes of gas to and from it. While gas is held in storage, title to it will be vested in the gas storage operator. This avoids any issues arising from the gas being commingled with gas held in the facility by other customers of the gas storage provider. The gas storage agreement will include terms to protect the rights of customers should the gas storage operator itself become insolvent. For gas in storage in England and Wales, these would typically include a confirmation from the gas storage operator that it holds the rights to the gas on trust for its customers collectively.
Instead of or as well as holding rights to gas in storage, the lender's customer might hold rights under "dematerialised" gas trading arrangements. These involve parties agreeing to buy or sell either a specified volume of gas or rights to a specified volume of gas in storage at a future date under the terms of a framework or "master" agreement (such as the EFET General Agreement or the NBP 2015, which is specific to the UK). In a typical sale and purchase transaction in dematerialised gas, the parties agree the purchase price, with delivery to take place at any agreed future time. Each party will submit a "nomination" to the gas transmission system operator for the notional amount of gas bought or sold. The relevant master agreement will specify that the obligations to make or take delivery of the gas are, actually, to make correct nominations. No gas physically changes hands.
How does a lender take security?
Whether the customer holds rights to gas in storage in England and Wales, or under gas trading agreements governed by English law, the lender is essentially taking security over contractual rights. A lender would take security over these assets by the borrower either charging or assigning its rights arising under a gas storage agreement or master agreement to the lender. Even in the case of gas in storage, the lender would not take security over the physical asset.
As is the case when taking a security assignment over any type of contract rights, lenders should be careful, when conducting due diligence on the underlying contracts, to check provisions restraining the parties from assigning their rights to third parties, and to ensure that appropriate consents to assignment are obtained from counterparties if necessary. A purported assignment in breach of a prohibition would be ineffective against the "assignor's" contractual counterparty. In addition, the "assignor" would be in breach of the contract.
Our experience is that in England (and also in some other jurisdictions, notably the Netherlands) most template gas storage agreements allow the customer to assign or create security over their rights arising from the contract, but only with the prior consent of the gas storage operator. The gas storage operator will be keen to understand to whom the lender would intend to sell the rights to gas in storage should the security be enforced, given the limited number of market participants.
A lender will usually enforce its security over rights to gas in storage or under a master agreement taken under English law by appointing a receiver to sell or collect in the secured assets in the name of the borrower. In itself, this is no different from enforcing security over many other types of asset. However, there are potential complications. Unsurprisingly there is a comprehensive licensing regime connected to gas storage and supply, so a purchaser will need to hold all relevant licences. Any purchaser of dematerialised assets will need access to the relevant trading platforms. These factors limit the number of potential purchasers, making it difficult to treat gas or rights to it as freely tradable assets. In the case of rights to gas in storage, the process may well involve a tripartite agreement being entered into with the gas storage provider, who may wish to exercise some control over who the purchaser will be.