Fri. Sep 24th, 2021

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#32 GSA – Gas Sale Agreement

14 min read

Gas Supply Agreement means the agreement between the Gas Supplier and the Gas buyer. The Company which buys the gas will use it as fuel at its facility.

This agreement includes the followings:

Article 1Definitions & Interpretations
Article 2Sale, Purchase & Guarantee
Article 3Period for sales & purchase
Article 4Initial Supply Date & Commissioning period
Article 5Annual Contract Quantity
Article 6Facilities & planned maintenance
Article 7Annual program & Gas Nomination Procedure
Article 8Delivery Pressure, Temperature & Rate
Article 9Quality
Article 10Price
Article 11Billing & Payment
Article 12Measurement
Article 13Take or pay obligation
Article 14Dispute Resolution
Article 15Assignment
Article 16Warranties & Indemnities
Article 17Force Majeure
Article 18Suspension & Termination
Article 19Governing Law
Article 20Notice
Article 21Miscellaneous

Article 1: Definitions & Interpretations

This article mainly contains the definition of the various term used in the Gas Sale Agreement & it also dictates the interpretation of various terms used in the Gas Sale Agreement.

Article 2: Sale, Purchase & Guarantee

In this article, seller agrees to sell and tender for delivery at the delivery point, and buyer agrees to purchase, receive and take at the delivery point and pay for gas in the quantities, at the times and at the prices determined in accordance with and subject to the term & conditions of this agreement. Other information like source of gas, gas to be supplied in commingled stream and also regarding buyer security confirmation is included in this article.

Article 3: Period for sales & purchase

The sale & purchase of gas shall be on a take or pay basis such that, Seller shall sell and tender for delivery, at the delivery point, Gas to buyer, or failing which pay liquidated damages, if any and Buyer shall purchase, receive and take at the delivery point and pay for gas at the prices determined in accordance with the agreement or pay amounts in respect of its pay for if not taken obligations in the event buyer fails to receive and take such gas.

Here, in this article, detail of the agreement period, contract years, extension period & recovery period is mentioned.

Article 4: Initial Supply Date & Commissioning period

In this article, detail about the gas supply initial (starting) date, testing & commissioning of the facilities date & remedies for delay if any is mentioned.

Article 5: Annual Contract Quantity

It is an important aspect of the gas sales contracts which specifies the amount of gas actually be bought and sold during any period. Without buyer’s and seller’s promise to purchase and supply some minimum amount of gas, merely signing a contract does not guaranty any sales at all. Therefore, quantity provision in a contract becomes very important. Various phases used to spell out quantities are;

a) Daily Contracted Quantity (DCQ): This is an agreed daily quantity by reference to which the Buyer makes its nominations for the deliveries of gas on each day. In supply contracts, the agreement specifies a fixed DCQ through out the contract period.

b) Annual Contract Quantity (ACQ) :This is the quantity of gas which the buyer expects to take in a Contract Year. It is equal to the product of multiplying the Daily Contract Quantity applicable for the relevant Contract Year by the number of days in the Contract Year.

c) Adjusted Annual Contract Quantity (AACQ): Each ACQ set shall be adjusted to some quantities in accordance with the procedure in the annual program article of this agreement and any DCQ so adjusted is referred as the “Adjusted Annual Contract Quantity”.

d) Delivery Capacity: It is the maximum quantity that the buyer can nominate and which seller is obligated to deliver. It is generally set as a fixed percentage of DCQ. The percentage variation (plus or minus) with respect to DCQ is known as swing.

Thus, seller’s capital investment must be sufficient to supply up to DCQ plus swing (i.e. Delivery capacity) which is termed as seller’s obligation.  However, buyer can request to supply up to DCQ minus swing.

Generally, the swing remains constant throughout the life of the contract but a seasonal variation can be incorporated in the contract.

e) Minimum nomination & seller obligation to deliver: Minimum nomination is the difference between the Daily Contract quantity and Swing which a buyer can nominate for delivery on any day.

Seller’s obligation to deliver gas is the quantity of gas nominated by the buyer so long as that nomination lies between the minimum nomination level and delivery capacity.

f) Excess Gas: Although, the seller is obligated to deliver gas up to delivery capacity, but generally the buyer can request greater volume known as excess gas. Mostly the price of excess gas remains higher than normal contract price.

g) Take or Pay Obligation: Currently, contracts typically specify a minimum payment each year, regardless of downstream demand, in terms of a take or pay requirements as the seller needs a form of guaranteed income before he can justify the investment needed to develop a gas field.

A take or pay provision is conceptually quite simple. The buyer promises the seller to take the delivery of a certain guaranteed minimum quantity of gas periodically (normally a year but it may be quarterly or monthly) or if it does not take delivery of that quantity, pays the seller for a quantity of gas equivalent to that which it fails to take. The buyer has the option to choose between the minimum purchase and the payment as alternate performance of the contract.

h) Make up rights : Take or pay provisions are typically coupled with Make-up provision that allows the buyer an option to recover the take or pay the payment. This is a right of the buyer in any contract year after it has made a ‘Take or Pay’ payment and has taken the delivery of Annual contract quantity for that contract year to take without payment or with reduced payment a quantity of gas equal to the deficiency quantity.

Make up rights are normally limited as to time (usually five years after they take or pay payment or within the contract term). For Make-up rights, the buyer must generally satisfy their purchase obligations for the current period before it is entitled to receive any gas as make up gas. Despite being a common practice, make up provisions do not exist unless the parties agree to them.

Article 6: Facilities & planned maintenance

a) Seller’s Facilities: On or prior to the commencement date, the seller shall ensure, at no cost or expense to the buyer, the readiness of the seller’s facilities to deliver gas under this agreement to the buyer. The Seller’s facilities shall be of appropriate design and sufficient capacity to supply gas to the buyer at the delivery point in accordance with the terms and conditions of the agreement. During the term, the seller shall repair and maintain or shall procure the repair and maintenance of, the seller’s facilities and all replacement thereto in good working order and condition and operate or procure the operation of the seller’s facilities in accordance with the standard of care of a reasonable & Prodent operator.

b) Buyer’s Facilities: On or prior to the commencement date, the buyer shall ensure, at no cost or expense to the seller, the readiness of the buyer’s facilities to receive delivery of gas from the seller at the elivery point. Buyer’s facilities shall be of appropriate design and sufficient capacity to procure gas from the seller in accordance with the terms and conditions of the agreement. During the term, the buyer shall repair and maintain or shall procure the repair and maintenance of, the buyer’s facilities and all replacement thereto in good working order and condition and operate or procure the operation of the buyer’s facilities in accordance with the standard of care of a reasonable & Prodent operator.

Also, both seller and buyer allow inspection of their facilities by the buyer and seller respectively on written request of buyer or seller.

Article 7: Annual program & Gas Nomination Procedure

In this article, the annual program of the buyer & seller of gas purchase & sell is mentioned. Also, the procedure for nominating gas (daily, monthly, quarterly) is mentioned in this article.

Article 8: Delivery Pressure, Temperature & Rate

In this article, pressure & temperature at the delivery point is mentioned. Also, the maximum change rate of nomination is mentioned here, i.e. how much a buyer can go beyond or below the DCQ.

Article 9: Quality

Here, the gas to be delivered under the agreement shall be delivered at the delivery point in accordance with the specification. If the is any change in the specification of the gas from the agreement, the buyer or seller shall notify the party and get it sorted as per the clause in the agreement.

Article 10: Price

The price which the buyer shall pay for quantities of gas to be sold and purchased in a contract year shall be as set out in the price side letter, which shall form an integral part of the agreement.

Article 11: Billing & Payment

All the billing & payment procedure & information is mentioned in this article.

Article 12: Measurement

The volume of the gas supplied under the agreement shall be measured by the flow meter installed at the Gas metering station of the Gas transporter. The volume measured would be converted to standard cubic meter by applying pressure & temperature corrections.

The Gas composition & calorific valve of gas shall be measured by a chromatograph of the seller.

Article 13: Take or pay obligation

Currently, contracts typically specify a minimum payment each year, regardless of downstream demand, in terms of a take or pay requirements as the seller needs a form of guaranteed income before he can justify the investment needed to develop a gas field.

A take or pay provision is conceptually quite simple. The buyer promises the seller to take the delivery of a certain guaranteed minimum quantity of gas periodically (normally a year but it may be quarterly or monthly) or if it does not take delivery of that quantity, pays the seller for a quantity of gas equivalent to that which it fails to take. The buyer has the option to choose between the minimum purchase and the payment as alternate performance of the contract.

Article 14: Dispute Resolution

The party shall use their respective reasonable endeavors to settle any dispute amicably through negotiations. The procedure of resolution is mentioned in this article of the agreement.

Article 15: Assignment

In this article the assignment of right procedure is mentioned.

Article 16: Warranties & Indemnities

In this article, the seller & buyer both will represent some sort of warranties & Indemnities. All the detail regarding the warranties & Indemnities from both ends are mentioned in this article.

Article 17: Force Majeure

The term ‘force majeure’ is defined as ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.

From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon the occurrence of a force majeure event.

A force majeure clause typically spells out specific circumstances or events, which would qualify as force majeure events, conditions which would have been fulfilled for such force majeure clause to apply to the contract and the consequences of the occurrence of such force majeure event. As such, for a force majeure clause to become applicable (should any force majeure event occur), the occurrence of such events should be beyond the control of the parties and the parties will be required to demonstrate that they have made attempts to mitigate the impact of such force majeure event. If an event or circumstance comes within the ambit of a force majeure event and fulfills the conditions for applicability of the clause then the consequence would be that parties would be relieved from performing their respective obligations to be undertaken by them under the contract during the period that such force majeure events continue.

Article 18: Suspension & Termination

The different cases when the buyer and seller can suspend or terminate the agreement is mentioned in this article. All the cases with procedure will be mentioned in this article.

Article 19: Governing Law

Here, in this article details regarding which country/state law will be applicable is mentioned here.

Article 20: Notice

How the notice of different parameters will be given to buyer from seller is mentioned here in details. It can be invoices or any other request.

Article 21: Miscellaneous

Other important details related to the agreement are mentioned here in this article.

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