/>iIt has recently been announced that an arbitral tribunal has found in favour of Venture Global, Inc. in its dispute against Shell concerning whether the ’start date’ of a long-term liquefied natural gas (LNG) sale and purchase agreement (LNG SPA) had occurred (or ought to have occurred) in respect of Venture Global’s Calcasieu Pass LNG liquefaction facility.
The dispute, which we referred to in a chapter on LNG delivery disputes, published in 2024 in the Fourth Edition of the Law and Business of LNG, has led to an increased focus on and tightening of contractual terms in LNG SPAs and may impact upon a series of ongoing disputes between Venture Global and other anchor buyers.
Background
The development of liquefaction facilities requires significant capital expenditure and is typically funded through project finance. To underpin this financing, the developer will often enter into LNG SPAs with anchor buyers of LNG that provide certainty of offtake and revenues to repay the financing.
Venture Global, the second largest US LNG exporter, is the developer of the Calcasieu Pass LNG liquefaction facility in Louisiana. In connection with the financing of the development of the Calcasieu Pass liquefaction facility, Venture Global entered into several LNG SPAs with buyers of LNG, including with Shell.
Venture Global’s model is to build liquefaction facilities using a modular design approach, which allows for quicker construction and lower capital costs for its facilities, intended to translate to lower liquefaction costs and lower cost LNG under its LNG SPAs.
The Dispute
Venture Global started producing LNG from Calcasieu Pass in 2022. However, rather than selling cargoes to its anchor buyers under its long-term LNG SPAs, it sold the cargoes into the spot market where prices were at record highs following the Russian invasion of Ukraine. Venture Global’s justification for this was that the Calcasieu Pass facility was still in the process of commissioning, and because the ’start date’ under its LNG SPAs was yet to occur pending completion of commissioning of the facility, it was not yet obliged to sell LNG to Shell (or its other buyers). Commissioning periods are required by sellers under LNG SPAs because sellers are often subject to deliver-or-pay obligations once the facility commences commercial operations (and so if there are issues with the facility, a seller will want to ensure these are resolved before this obligation comes into force to ensure that it can meet its supply obligations). Venture Global attributed the lengthy commissioning process to the novel modular design of the Calcasieu Pass facility and issues with its power generation facilities.
Shell argued that Venture Global’s sale of cargoes in the spot market demonstrated that the Calcasieu Pass facility was capable of carrying out commercial operations such that the ’start date’ under its LNG SPA ought to have occurred. Shell alleged that Venture Global made undue profits of $3.5 billion by selling cargoes into the spot market rather than under its long-term LNG SPAs. A report by the consultancy Compass Lexecon commissioned by Shell concluded that in a 908-day period between October 2022 (when the facility is alleged to have reached full capacity) to May 2024, Venture Global sold 330 cargoes into the spot market, resulting in $3.5 billion of additional revenues in excess of the revenue Venture Global would have earned if it had supplied LNG under its LNG SPAs.
Shell argued that as a result of its failure to supply, it and Venture Global’s other buyers were forced to buy gas from alternative sources in the spot market in order to honour their supply contracts with customers. This meant incurring significant losses due to the high spot prices in the gas markets. Shell’s arbitration proceedings sought to compel Venture Global LNG to comply with its interpretation of the LNG SPA and supply LNG, as well as seeking damages.
Implications for the other disputes and buyers of LNG
While the arbitration with Shell concluded in favour of Venture Global, it is understood that Venture Global is also in dispute with a number of its other anchor buyers in relation to a similar fact pattern under its other LNG SPAs. Venture Global CEO, Mike Sabel, told investors on an earnings call following the arbitral decision that “[Venture Global remains] confident of similar outcomes in the balance because it’s the same contracts and facts around construction, and the facts around the completion of the facility are all the same”. The Shell case may influence the other ongoing arbitrations against Venture Global, or lead to their compromise.
In light of the disputes concerning the ‘start date’ of the LNG SPAs relating to Calcasieu Pass facility, there has been an increased focus and tightening of contractual terms in LNG SPAs, with greater attention focused on commissioning procedures, the ability of sellers to sell cargoes to the spot market during the commissioning period (or whether these must be sold to the buyer under the LNG SPA on ad hoc basis) and force majeure provisions. This focus can only be expected to continue following the recent arbitration decision.
