Posted: March 5th, 2023

Role of Maritime Arbitration in Resolving LNG Contract Disputes Amid Energy Transition Between West Africa and Asia

Role of Maritime Arbitration in Resolving LNG Contract Disputes Amid Energy Transition Between West Africa and Asia

The global energy market is undergoing a rapid transition, driven by environmental concerns, technological innovations, geopolitical shifts and economic fluctuations. One of the key challenges facing the energy sector is how to ensure a reliable, affordable and sustainable supply of natural gas, especially liquefied natural gas (LNG), which is increasingly seen as a cleaner and more flexible alternative to coal and oil. LNG is a form of natural gas that has been cooled to -162°C, reducing its volume by 600 times and making it easier to transport by sea. LNG is produced in liquefaction plants, where natural gas is purified and condensed, and then shipped to regasification terminals, where it is heated and converted back to gas for distribution and consumption.

West Africa and Asia are two regions that have a significant stake in the LNG market, both as producers and consumers. West Africa has abundant natural gas reserves, mainly in Nigeria, Angola, Equatorial Guinea and Ghana, and has been exporting LNG to Europe and Asia since the early 2000s. Asia, on the other hand, is the largest importer of LNG in the world, accounting for more than 70% of global demand in 2020. China, Japan, South Korea, India and Taiwan are the top five LNG buyers in Asia, driven by their growing energy needs, environmental policies and diversification strategies. The LNG trade between West Africa and Asia has increased over the years, reaching 14.6 million tonnes in 2020, up from 9.4 million tonnes in 2016.

However, the LNG market is also facing various challenges and uncertainties that may lead to disputes between LNG producers and buyers. One of the main sources of contention is the pricing mechanism of LNG contracts, which typically have a long-term duration of 15 to 25 years and are linked to the price of oil or other energy indices. This means that the price of LNG may not reflect the actual supply and demand conditions in the market, creating a mismatch between the contractual obligations and the economic realities. For example, since 2014, the price of oil has declined significantly due to oversupply and reduced demand amid the COVID-19 pandemic, while the price of LNG has fluctuated widely due to seasonal variations, regional imbalances, weather disruptions and geopolitical events. As a result, many LNG buyers in Asia have been paying higher prices than the spot market rates for their contracted LNG volumes from West Africa and other regions, creating a situation of economic hardship and dissatisfaction.

Another source of potential conflict is the performance of LNG contracts in terms of quantity and quality. LNG contracts usually specify a certain volume of LNG that the seller must deliver to the buyer each year or month, with some flexibility or tolerance allowed for deviations. However, due to various operational and logistical issues, such as lack of infrastructure, technical problems, force majeure events or sanctions, some LNG sellers may fail to deliver their contractual obligations in full or in part, causing supply shortages or disruptions for the buyers. Conversely, some LNG buyers may seek to reduce or cancel their contractual take-or-pay obligations due to lower demand or preference for cheaper spot cargoes, causing revenue losses or stranded assets for the sellers. Additionally, some disputes may arise over the quality or specifications of the delivered LNG, such as its heating value, composition or impurities, which may affect its suitability for certain end uses or markets.

Given these challenges and uncertainties in the LNG market, it is inevitable that some disputes will arise between LNG producers and buyers from time to time. However, resolving these disputes through litigation may not be the most efficient or effective option, as it may entail high costs, long delays,
complex procedures and uncertain outcomes. Moreover, litigation may damage the long-term relationship between the parties and expose them to reputational risks or public scrutiny. Therefore, many LNG contracts include arbitration clauses that provide for an alternative dispute resolution mechanism that is more flexible,
confidential, neutral and enforceable than litigation. Arbitration allows the parties to choose their own arbitrators,
rules, laws and venues for resolving their disputes in a binding and final manner.

Maritime arbitration is a specialized form of arbitration that deals with disputes arising from maritime activities or transactions,
such as shipping contracts (charterparties), bills of lading,
marine insurance policies or shipbuilding agreements.
Maritime arbitration is particularly suitable for resolving LNG contract disputes because it can address the complex technical,
commercial and legal issues involved in the production,
transportation and consumption of LNG. Moreover,
maritime arbitration can accommodate the diverse interests
and expectations of the parties from different jurisdictions
and cultures.

Some of the advantages of maritime arbitration for resolving
LNG contract disputes are:

– Expertise: Maritime arbitrators are usually experts
in maritime law or practice who have extensive knowledge
and experience in dealing with LNG-related issues, such as
liquefaction, regasification, storage, transportation, measurement,
quality, safety and environmental standards. They can also
appoint technical experts or consultants to assist them in
understanding the factual or scientific aspects of the dispute.

– Flexibility: Maritime arbitration allows the parties to tailor
the arbitration process to their specific needs and preferences,
such as the number and qualifications of the arbitrators,
the language and location of the arbitration, the applicable
rules and laws, the scope and duration of the proceedings,
the evidence and discovery methods, and the remedies and
relief available.

– Confidentiality: Maritime arbitration is a private and confidential
process that protects the sensitive information and interests
of the parties from disclosure to third parties or the public.
This can help preserve the reputation and relationship of the
parties, as well as avoid interference or influence from external
factors or stakeholders.

– Neutrality: Maritime arbitration provides a neutral and impartial
forum for resolving disputes between parties from different
countries or regions, without favoring or disadvantaging any
party based on its nationality, domicile or legal system. The
parties can choose arbitrators who are independent and unbiased,
as well as rules and laws that are neutral and acceptable
to both sides.

– Enforceability: Maritime arbitration awards are final and binding
on the parties, subject to limited grounds for challenge or appeal.
They are also widely enforceable around the world under various
international conventions and treaties, such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has 168 contracting states, including most of the major LNG producing and consuming countries.

In conclusion, maritime arbitration is a viable and attractive option for resolving LNG contract disputes amid the energy transition between West Africa and Asia. It can offer a fast, efficient, cost-effective and satisfactory solution for the parties, while preserving their long-term cooperation and mutual trust in the LNG market.

References:

– Finizio, S., Trenor, J., & Tan, J. (2020). Trends in LNG supply contracts and pricing disputes in the Asia Pacific region. Oil, Gas & Energy Law Intelligence, 18(2). Retrieved from https://www.wilmerhale.com/insights/publications/20200522-trends-in-lng-supply-contracts-and-pricing-disputes-in-the-asia-pacific-region

– Freshfields Bruckhaus Deringer. (2023). LNG disputes gather on the horizon amid market volatility. International Arbitration Top Trends 2023. Retrieved from https://www.freshfields.com/en-gb/our-thinking/campaigns/international-arbitration-in-2023/lng-disputes-gather-on-the-horizon-amid-market-volatility/

– Reuters. (2017). LNG sellers, Asian buyers spar as contract fight brews amid glut. Retrieved from https://www.reuters.com/article/us-asia-lng-singapore-legal-idUSKBN18S3J9

– Zoback, M., & Zoback, M. (2023). LNG contracts in the Asia-Pacific region: Disputes on the horizon? Oil, Gas & Energy Law Intelligence, 21(4). Retrieved from https://www.ogel.org/article.asp?key=3715