Before studying law and qualifying
as an English Solicitor, Pushpa Pandya studied Applied Biochemistry and
also obtained Master of Philosophy degree in Biochemistry/Toxicology.
She worked briefly at Metropolitan Forensic Science Laboratory in London
before switching to law. Pushpa completed her legal training with a
large international city law firm specialising in maritime matters in
London, before working for more than 10 years at a leading P & I club in
London, where she specialised in providing legal advice in FD & D
matters to the club members, principally from the Indian subcontinent.
In 2005 she added the New York Bar to her legal qualifications before
joining Consult Marine Ltd. in early 2006. Pushpa now specialises in
advising and handling dispute on behalf of a wide range of clients,
including ship-owners, charters and commodity traders.
With the exception of Russia, which has large
reserves, LNG tends to be found in parts of the world where the sun is
abundant supply and to all appearances the future of the LNG trade is just
as sunny, whilst the transportation of LNG by sea has certainly become the
so-called “sexy” sector of the shipping industry. It is rare nowadays to
open a shipping publication without reading something about the LNG trade,
whether it be about yet another new project or an update on existing
projects, reports of new orders for LNG carriers, or of new players joining
the LNG market.
In the past few years there has been a massive increase in the momentum of
the LNG business, not only in the expansion of existing projects but also
the development and commissioning of new projects. This momentum is due in
part to the energy demands of the emerging economies, particularly India and
China, alongside the established and seemingly insatiable energy demands of
the USA. It also due in part to the recognition of the fact that, unlike
other kinds of fuel such as petroleum and coal, LNG is relatively safe (with
a hitherto exemplary safety record) and environmentally friendly (if it is
spilled, it evaporates and has no long term adverse effect on the ecosystem
and so poses little or no risk of pollution) and does not therefore attract
the protests of environmentalists.
So far so good? While the conclusion of new projects may be good news for
the relatively small number of lawyers involved in the drafting of the
various types of agreement that arise from the trade, we lawyers tend as a
rule to prefer to look on the gloomy side of things and imagine what may be
in it for us if things go wrong. A little perversely then, when preparing
this paper on the LNG trade, I thought I would see if there might be a
darker side to the trade and the issues that may arise in the LNG trade to
keep the lawyers busy. Of course there is not enough time today to offer any
exhaustive review but I will at least try to highlight some of the more
New kids on the block
The transportation of LNG is an integral part of the LNG project. In
addition to its exemplary safety record and the fact that LNG is
environmentally friendly, it is also non-corrosive. This makes LNG a very
attractive commodity to carry. Add to this the lucrative regular income it
can attract and it is easy to see why there are a lot of excited ship
owners, or would-be ship owners, out there!
Because of the non-corrosive nature of LNG the working life of an LNG
carrier is longer than for most other types of vessel, and even the oldest
LNG vessel, the 41 year “Cinderella”, still has its appeal with talk of
commercial re-activation still in the air. This will inevitably attract more
and more new players to join LNG bandwagon. Until now LNG owners have been a
small and select group. New players will inevitably include ship owners who
may (or may not) be experienced in other fields of shipping but certainly no
experience of the unique considerations that apply to the transportation of
LNG projects are of course very capital intensive with LNG carriers
attracting prices of the highest order. At the same time they offer the
potential for very lucrative, and often long term, regular income. Add to
this the fact that the high freight markets of recent years have made many
ship owners cash rich and the potential undoubtedly exists for new players
with little experience in the field to enter the LNG market whereas once it
was the domain of the very few.
Changing trading patterns
Until recently 90% of the LNG trade was conducted under long term contracts
of affreightment or by owners of LNG carriers who were the actual traders
in, or users of, the LNG and who saw the obvious advantages of having their
own fleet of LNG vessels available to satisfy their own in-house or captive
requirements and reduce transportation costs. Now, however, shipping
companies anticipating the increase in LNG demand are building new LNG
carriers to trade on the spot markets with no underlying LNG contracts in
place. What has been termed a “more tradeable LNG business” may now emerge.
Reports of LNG cargoes being stored on vessels to cash in on anticipated
high winter gas prices in Europe and of ship-to-ship transfers offer a
glimpse of the way in which the market may develop. Just as significantly,
there are reports of operators in Taiwan declaring themselves committed to
operating LNG carriers like taxis that are available to pick up any passing
LNG cargoes on the spot market. All these point to the LNG market shifting
towards a trading environment similar to the oil market. If this happens
disputes will no doubt arise where before there were none because of the
previously close and tied nature of the trade.
Building the new fleet
As all sectors of the shipping market continue to prosper, the order books
of the major shipyards with experience of building LNG carriers are full.
How then will the demand for capacity be satisfied? Inevitably other and
newer yard may cash in on the situation. As we have seen in other - and less
sophisticated - sectors, though, the quality of build (and even the
existence of facilities to build) at some of these yards may give cause for
concern, or more tangibly lead to disputes involving potentially substantial
Just as significantly, delays in the delivery of new buildings may give rise
to disputes, not only with the yards but also with the ship owners’ LNG
customers. Where LNG new buildings are ordered on the back of specific LNG
projects or for long term time charters (as will no doubt continue to be the
case in many instances), the losses caused by such delays may, again, be
substantial. Particular care will therefore be required in the drafting of
provisions for late delivery as the ship owners balance their interests
under new building contract and employment contract for the vessel.
Adapting to new trading limits
Often in the past LNG carriers have tended to spend long periods of time
serving in dedicated trades for a specific project, acting as a “floating
pipeline” for the passage of LNG through a limited range of terminals, well
suited to the vessel and well known to its crew. As LNG becomes more of a
trade the range of terminals at which LNG carriers will have to call is
bound to increase.
Just as new players are emerging on the ship owning side so, too, new
players are emerging on land. New receiving terminals for LNG are rapidly
being developed. In India alone LNG terminals in Dahej, Kochi, Hazira,
Ratnagiri, Mangalore and Kakinada are in various stages of development or
proposal. These terminals are owned mainly by state owned utilities or oil
or gas majors such as Shell (in the case of Hazira), although private
funding is now beginning to emerge. The number and size of the terminals is
growing in response to the larger size of the expanding LNG fleet worldwide.
Many of the existing terminals were designed for vessels of a maximum size
of 135,000 cubic metres. Recent new orders have however involved vessels
with capacities of 210,000 – 260,000 cubic metres. Clearly therefore
existing receiving and storage facilities will need to be upgraded.
The development of these new LNG terminals (including off shore terminals),
and the upgrading of existing facilities, will raise questions as to the
ability of vessels to comply with the requirements of a new wider range of
facilities when trading worldwide. In anticipation of this, terms of charter
parties for the carriage of LNG make provision for the allocation of
responsibility for the time and cost of any modifications necessary to allow
the vessel to trade to different terminals worldwide. As an example of this,
the ShellLNGtime1 form clause 4 (d) warrants that the vessel is compatible
with the LNG terminals listed in Appendix A without modification. If any
modification of the vessel becomes necessary the cost of such modification
is to be for the owners account and the vessel will be off hire during the
period of the modification. Such matters may well to give rise to problems
for vessel’s fixed to trade within wide geographical limits as new LNG
terminals come on line.
On the other side of the same coin, when new terminals are opened or
existing ones expanded to deal with the increasing size of LNG carriers
questions may well arise as to the safety of those terminals. Both the
Shelltime 4 and the ShellLNGtime 1 form only requires the charterers to use
due diligence to ensure that the vessel is employed between and at safe
places. These clause expressly state that the charterers do not warrant the
safety of any place to which they order the vessel and are only liable if
any damage or loss is caused by their failure to exercise due diligence, a
low standard for charterers to comply with where the potential level of
damage that may be sustained is so high.
Maintenance obligations for LNG
As already observed, LNG shipping has an exemplary safety record to date. As
however the LNG fleet expands rapidly with new buildings coming into service
and as the nature of the trade changes a priority must be to maintain that
The maintenance obligations under clause 1 of the ShellLNGtime 1 form are
wider than those for oil tankers and require the vessel to be “at the date
of delivery of the vessel under the charter and throughout the charter
period” fit to load discharge and measure LNG, as well as being tight,
staunch and in good order and condition and every way fit for the service.
An obvious concern in this respect is the continued supply of properly
trained and competent crew for an expanded LNG fleet. LNG vessels are
technologically advanced and require crew with experience and a working
knowledge of the technology and its operation. There are concerns that the
rapid expansion of the world LNG fleet will outpace the training and
recruitment of experienced crew leading to obvious dangers and problems of
under manning and poor maintenance. In particular, with the rapid increase
in the number of LNG vessels it is becoming difficult to find skilled
seafarers who hold a steam turbine qualification let alone ones that are
experienced in dual fuel electric engines. Problems that cannot be dealt
with promptly and effectively may lead to offhire, and possibly even more
serious, disputes and claims.The maintenance provisions of Clause 3 of the
ShellLNGtime1 form are based on the Shelltime 4 form. Unfortunately they are
not straightforward and have already been the subject of a number of legal
decisions. More are to be expected.
Charter party terms particular to LNG
There is in some respect little difference between the chartering of a large
LNG vessel and a large crude oil tanker. For that reason the LNG trade has
tended to adopt and adapt oil tanker charter party forms. The
characteristics of LNG, particularly at extremely low temperature, and the
technology required to transport it safely are however different. It is
logical therefore the terms for the carriage of LNG should reflect the
specialised aspects of the trade.
Until recently there was no charter party in use that was dedicated to the
LNG trade. Until the ShellLNGtime1 form came in use in April 2006, the
shipment of LNG was mostly done by the Shelltime 4 and Asbatankvoy forms
with rider clauses to suit the LNG trade. The ShellLNGtime1 form has been
approved by BIMCO and I understand from Shell that in the three month period
from April to July of this year the charter has formed the basis of about
100 contracts, none of which to date has given rise to a single dispute. As
any good lawyer will tell you, there is no such a thing as a perfect
contract and the fact that no dispute has arisen to date may be due to the
fact that most of the contracts are still long term ones under which any
minor disputes are likely to be ironed out over the period of the charter in
the interests of the commercial relationship between the parties. This does
not mean that disputes will not arise in the future as the LNG fleet and
number of players in the market increases both in number and size.
Monitoring the vessel’s performance
The key issue for charterers of LNG vessels may often be not only the
vessel’s performance as such but also its ability to meet its prescribed
arrival and discharge times. Scheduling at LNG terminal is complex and any
delay in arrival or during discharge of the vessel can have a substantial
financial impact on the partners involved. Appendix C of the ShellLNGtime 1
from sets out in detail the parameters which are to be taken into account in
calculating the vessel’s performance in terms of speed warranties, scheduled
arrival times, fuel consumption and boil off. These will no doubt give rise
to disputes as the LNG trade expands and embraces new players.
At the beginning of this paper I referred to the sunny aspects of the LNG
trade. There can be little doubt that the future of the LNG trade is bright.
Thus far the limited and restricted nature of the trade, and an exemplary
safety record, has left it relatively unscathed by lawyers and disputes.
Complacency can often, however, breed trouble. As, however, the nature of
the trade develops, expands and changes new challenges will arise and it
seems inconceivable that disputes will not arise in the future. This paper
has highlighted at least some of the areas where such disputes may arise.
For the time being at least, though, my plans to buy a new Porsche from fees
charged to the LNG trade may have to be placed on hold.
Consult Marine Ltd.
30 Hobbs Court
2 Jacob Street