The Drafting of LNG Charters

• Author: Lindsay East
• Position: Partner, Reed Smith. This paper was presented to the Annual Conference of the Maritime Law Association of Australia and New Zealand, November 2008 at Fremantle, Western Australia
• Pages: 19-29

Drafting of LNG Charters

Lindsay East∗

Introduction

This paper deals with aspects of the drafting of liquefied natural gas (LNG) charters. This is obviously a big

topic and I will therefore concentrate on certain areas. Those areas are:

1. the type of charter used;

2. the relationship between the Owner, the Charterer, the Builder and the Banks;

3. particular points to look for in long term charters; and

4. dispute resolution. Always important to a lawyer, but also to the client.

Background

LNG is a rapidly growing market and in the area which I have some particular expertise, Qatar, there are

interests in over 75 LNG vessels both built and to be delivered in the next few years. Some of these vessels, for

example Q-Max, are very large indeed. Traditionally, LNG chartering was done on the basis of an individual

project. The sale contract was entered into between the Seller and the Buyer and LNG vessels were built to

service that particular project and were on long term charter to the Charterer or an Affiliate of the Charterer.

That has now begun to change, although it is perhaps, still early to talk about there being a spot market for LNG.

There are now Contracts of Affreightment, short term time charters, voyage charters, cargo swaps and single

cargo contracts. However, I think that the focus is still on the long term time charter and that is what I am going

to talk about today.

Type of Charterparty

As I have already said, the majority of the long term projects currently underway are supported by long term

time charters which are traditionally based on the well known tanker time charter forms, Shelltime 4 and

ExxonMobiltime 2000. I am going to concentrate on ExxonMobiltime 2000 as this is the contract with which I

am most familiar. In the work I have done over the last 5 or 6 years, I have grown quite sick of some of the

clauses in ExxonMobiltime 2000! Nevertheless, it will help to illustrate points that Owners and Charterers

should concentrate on .

Relationships

The main relationship, obviously, and the one in which I will spend most time, is the relationship between an

Owner and a Time Charterer. However, both Banks and Builders are also important. They all have a part to play

and, particularly so far as the Banks are concerned, some of the clauses in the time charter are of considerable

importance to them. Indeed unless the clauses in the time charter are satisfactory, the Banks are reluctant to

finance the project at all. I remember discussing with the legal representatives of a well known finance Bank, the

original draft terms of an ExxonMobiltime 2000 as amended by our clients, and the Bank’s lawyers telling me

that this particular document was unfinanceable. The reason for this, as is clear, is that the Banks, wearing their

Owners’ hat, thought that there were not enough safeguards for the Owner. Nevertheless, the project was

financed!

As I have already mentioned, the majority of the long term charterparties were entered into to back up a long

term sale contract (although that is now beginning to change) and newbuildings are ordered to fulfil that

charterparty, which means that the two contracts must proceed in tandem. The other contract that must proceed

in tandem is the shipbuilding contract. The Builder does not have a direct interest in the relationship between

Owner, Charterer and Bank. The Builder wishes to have the best available contract, with the least onerous terms,

∗ Partner, Reed Smith. This paper was presented to the Annual Conference of the Maritime Law Association of Australia and New Zealand,

November 2008 at Fremantle, Western Australia.

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