Gas Purchase and Sales Agreement Presented by Phumelele Madala Director, Edward Nathan Sonnenbergs

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Gas Purchase and Sales AgreementPresented by
Phumelele MadalaDirector, Edward Nathan
Sonnenbergs

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Brief Description of the Project

• Seller - South African Gas Supplier Limited
  (SAGS) has
• a concession licence from the Gas Regulator to
  produce, transport and sell gas for 25 years
• gas wells and will need to build a pipeline (to
  be project financed) with capability of adding
  compression to increase capacity and permit
  multi-users
• certified through experts that there are possibly
  proven and probable gas reserves of up to 25 years

• Buyer is Coastal Energy Limited (CE) will
• buy the Gas in terms of a GSA from SAGS
• use the gas as fuel to fire a 600MW electricity
  base load power plant in the Eastern Cape

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Schematic Diagram
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Legislative Framework

• National Energy Regulator Act, 2004 (No. 40 of
  2004)
• The Gas Act, 2001 (No. 48 of 2001) as well as its
• Piped Gas Regulations

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Legislative Framework

• The Regulations make further references to
  compliance issues covered in other pieces of
  legislation such as

• Promotion of Administrative Justice Act, 2000
  (Act No.3 of 2000)
• Promotion of Access to Information Act,2000 (Act
  No.3 of 2000)
• Employment Equity Act, 1998 (Act No. 55 of 1998)
• National Environmental Management Act, 1998 (Act
  No. 107 of 1998)

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Key Principles for Gas Supply

• The key to procurement of fuel in any power plant
  project must lie in the following 2 facts
• The fuel supply must be firm, which implies
• Predictability in terms of price, quality,
  quantity and
• Consistency in terms of supply
• The fuel must, for environmental reasons, be
  clean

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Terms of the Gas Supply Agreement

• Conditions Precedent
• SAGS
• to obtain all applicable Consents including for
  trading and transportation of the gas
• to issue a guarantee in favour of CE in respect
  of both the quality and quantity of gas
• CE
• to obtain all applicable Consents including for
  trading, storage and distribution facilities
• to issue a guarantee in favour of SAGS for
  payment obligations

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The Term of the Agreement

• Usually directly linked to the availability of
  gas reserves (Designated Gas Reserves)
• SAGS has reserves of up to 25 years
• Either Party may undertake reserve calculations
  and recalculations costs to be shares equally by
  the parties
• Term is 10 years from the Commencement Date with
  an option to renew for a further 10 years

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Commencement Date

• To be achieved through a funnelling system.
• This involves a series of stepped down
  notification periods to permit the commencement
  date to be determined with certainty
• The funnelling mechanism incorporates and takes
  account of the activities and completion dates
  for
• - SAGS to complete pipeline construction
• - SAGS to prepare for delivery of commissioning
  gas
• - EPC to advise of plant completion date, and
• - OM to prepare OM activities

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Delivery Point

• Point where the SAGS pipeline links up with CEs
  gas reception facilities
• SAGS transports and delivers at its own costs and
  risk up to this point
• SAGS liability ends at CEs gas reception
  facilities at the power plant
• SAGS controls the flow and pressure of the gas at
  this point
• Title to, ownership (where payment has been
  received), custody and risk of loss passes to CE
• CE in charge of installing and maintaining its
  reception facilities, including any fuel
  conditioning equipment needed to ensure
  compliance with OM requirements
• SAGS to install and maintain fuel metering
  equipment at the delivery point to measure the
  quality and quantity of gas received
• CE will have rights of access to measurement
  equipment for verification of its accuracy
• Delivery tolerances to be agreed as SAGS will
  control the flow and pressure at the Delivery
  Point

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Conditioning equipment

• Conditioning equipment includes, as a minimum,
  all necessary temperature, pressure and
  filtration plant, as well as any chemical dosing
  or treatment facilities needed to effect storage
  and operation
• Thermal insulation and trace heating may have to
  be installed by CE, where necessary, to
• Such equipment would need to be designed in
  accordance with recognised international
  standards

- maintain the characteristics of the gas in
storage facilities to the standards required for
the operation of the power plant and - Prevent
damage from extreme ambient conditions
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Nominations and Variations

• CE to give 24 hrs notice of nominated quantities
  of gas
• Timing and method of communications and requests
  to be specified
• Aggregate of nomination per day shall not exceed
  the Maximum Daily Quantity (MDQ), set at 110 of
  the Daily Contract Quantity (DCQ)
• Minimum threshold to apply to nominated
  quantities of gas and set by SAGS

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Price

• The price to have the ability to pass through
  costs to the off-taker through capacity (Capex
  OM) and energy (variable OM) charge components
• Price for the Gas at Commencement Date will be
  ZAR equivalent to 1,50 per GJ
• Price will be increased on each anniversary of
  the Commencement Date by CPIX
• Monthly invoicing and annual reconciliations
• Interest on late payments

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Supply of Gas
Take or pay

• SAGS has to ensure a secured and continuous sale
  of a minimum amount of gas for the term of the
  contract in order to meet its financial
  commitment in respect of its own capital
  expenditure and operating costs ie costs of
  building the pipeline and operating same
• CE on the other hand needs to ensure a sufficient
  and adequate supply in order to ensure the power
  plant is able to perform in accordance with its
  dispatch instructions
• Therefore the supply and demand of gas is subject
  to a system where CE is obliged to receive a
  total contract quantity over the term of the
  contract TCQ and SAGS is obliged to provide the
  TCQ
• Take or Pay commitment is usually 90 of the TCQ
• CEs annual take or pay quantity commitment shall
  be 90 of the adjusted ACQ

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(Cont) Supply of gas
The adjusted ACQ for each year shall be the
aggregate of the DCQs for that year minus

• Shortfall gas quantities
• Gas not delivered due to Force Majeure effecting
  SAGS or CE
• Gas not delivered due to Scheduled maintenance
  reductions, and
• Any permitted carry-forward gas from the
  preceding year

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Further Supply Provisions

• Commissioning Gas - testing gas delivered prior
  to the commencement date, price is usually
  discounted and does not form part of CEs take or
  pay commitment
• Make-Up Gas excess gas paid for but not taken
  during the year which CE may recover at a zero
  contract price
• Carry Forward Gas basically excess gas taken
  by CE and carried forward to the next year
• Excess Gas CE to pay where it may require
  Excess Gas in a variation to a nominated delivery
  quantity
• Undertake or Overtake Gas- where CE under takes
  or over takes at Delivery Point, has to pay a
  premium
• Off-Specification Gas- SAGS liable unless CE
  accepted gas knowingly. If CE took unknowingly
  then shall be deemed as Off-Spec Gas

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Scheduled Maintenance

• Scheduling of maintenance of Pipeline, Delivery
  Point and Power Station, to be co-ordinated
• Both parties relieved of obligations at this time
• Scheduled maintenance to be planned and agreed
  between the parties up to six months in advance

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Force Majeure

• Customary Force Majeure provisions and exclusions
  to apply
• Definition to include reservoir failure relief
  and unforeseeable damage or destruction to the
  pipeline
• CE may purchase gas from a third party during the
  subsistence of a Force Majeure event

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Exclusivity

• SAGS shall not supply gas from the designated
  reserves to any other party without the consent
  of CE
• CE shall not acquire gas from any other party
  other than with the consent of SAGS

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Termination Events

• Non-delivery and non-receipt for a continued
  period of six months
• Force Majeure event subsisting for continuous
  period of six months
• Failure to deliver by SAGS for a continuous
  period of four months
• Failure to accept delivery for a continuous
  period of four months
• Failure by CE to make payment
• If the conditions precedent are not fulfilled by
  an agreed longstop date
• Any other non-remedial breach by the Parties

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Miscellaneous Provisions

• Warranties and Representations
• Change in Control of both parties
• Applicable Law
• Taxes
• Confidentiality
• Costs
• Insurances
• Notices
• Dispute Resolution etc

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Schedules
Proposed schedules to the agreement may include

• Delivery Point Schedule
• Supply Area and Designated Reservoirs Schedule
• Measurement Schedule
• Gas Specification Schedule

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Conclusion

• Risk identification, analysis and mitigation is
  crucial
• Its important to understand the whole project
  value chain including the structure and funding
• Its important to act as a reasonable and prudent
  project participant
• A Gas supplier should aim to commercialize its
  gas reserves and be aware that a buyer will
  attempt to match GSA terms with downstream
  commitments

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Thank You