Legal Structures and Commercial Issues for LNG Export Projects -- North America & Beyond

1. Legal Structures and Commercial Issues for LNG Export Projects --North America & Beyond Steven R. Miles Baker Botts L.L.P. January 15, 2013 New York, NY

2. Presenter Introduction • Recent LNG Deals: • Developing greenfield LNG liquefaction projects: • Sabine Pass LNG Wheatstone LNG Yamal LNG • Peru LNG Darwin LNG Qatargas 3 • Tangguh LNG Equatorial Guinea Angola LNG • Brass LNG Sakhalin II Pacific Rubiales • Developing the first U.S. LNG export project in 40 years • Securing the first LNG supply into new terminals in Brazil, Chile, China, Dominican Republic, E.U., India, Indonesia, Mexico, Puerto Pico, & U.S. • Negotiating some $500 Billion in LNG sales agreements • Chartering 73 LNG vessels (~20% of world fleet) • Co-Chair of industry-wide effort for the recently completed uniform LNG Master Sales Contract

3. Presenter Introduction

4. Focus and Overview of Key Topics • Common Project Structures in an LNG Export Project • Integrated Upstream Model • Merchant Model • Tolling Model • Commercial Issues Associated with N.American LNG Projects • LNG Regulatory Regime • FERC authorization • DOE Export authorization • Policy Issues • Final Remarks

5. Common Project Structures – LNG Export Projects

6. Common Project Structures – LNG Export Projects • Three primary project structures for LNG liquefaction projects: • Integrated Upstream Model: Participants own gas supply and LNG plant, and market own LNG • Merchant Model: Project company that owns the liquefaction facility purchases natural gas from 3d party and sells LNG to offtakers • Tolling Model: LNG plant does not take title to natural gas feedstock or LNG produced at the plant, but provides liquefaction and processing services

7. Physical Assets Ownership Leases/ Licenses Upstream Oil and Gas Assets Joint Operating Agreement(s) Gas Producers Gas LNG Liquefaction Plant, Common Facilities, and Loading Port EPC Contracts Joint Marketing Agreement LNG LNG Offtake LNG Buyers LNG Sale and Purchase Agreement(s) Common Project Structures – Integrated Upstream Model

8. Common Project Structures – Integrated Upstream Model • Benefits: • Alignment of interest throughout value chain • May have tax and accounting benefits (may be able to use early losses from LNG plant construction to offset revenues from natural gas or liquids production) • Promotes financeability by reducing cross-default risk • Each gas supplier may control its own marketing • Risks: • Requires identical ownership of upstream and downstream assets (structuring with TrainCos can allow future trains with separate ownership) • Key Contracts: JOAs, PAA, LBA • Example: Alaska Gasline

9. Contracts Physical Assets Ownership Lease/License/ JOA Upstream Oil and Gas Assets Gas Producers Gas Sales Agreement(s) Gas LNG Liquefaction Plant, Common Facilities, and Loading Port EPC Contract Project Company LNG LNG Sale and Purchase Agreement(s) LNG Offtake LNG Buyers Common Project Structures – Merchant Model

10. Common Project Structures – Merchant Model • Benefits: • Allows Project Co. to generate potentially higher returns based on value of LNG/gas price spread • Allows Project Co. sponsors greater control in sourcing gas and marketing LNG • Risks: • Project Co. assumes market and counterparty default risks both upstream and downstream • Requires Project Co. to obtain finance for plant construction based on LNG sales and project revenues • Key Contracts: SPA, GSA • Examples: Sabine Pass, Golden Pass, several BC projects

11. Physical Assets Ownership Contracts Upstream Oil and Gas Assets Leases/ Licenses Gas Producers Joint Operating Agreement(s) Gas LNG Liquefaction Plant, Common Facilities, and Loading Port EPC Contracts Tolling Company Liquefaction Tolling Agreement(s) LNG LNG Offtake LNG Buyers LNG Sale and Purchase Agreement(s) Common Project Structures – Tolling Model

12. Common Project Structures – Tolling Model • Benefits: • Avoid commodity price and marketing risks • Allows flexibility in ownership -- does not require that all upstream parties be owners of LNG plant • Reduced risk can help project financing of LNG plant, if the tolling customers have sufficient creditworthiness • Risks: • Sponsors do not profit from LNG sales • If the gas supplier (toller) is an affiliate of sponsor, security and cross-default issues can affect financing • Key Contracts: TSA, LBA • Examples: Jordan Cove, Cameron, Freeport, Cove Point, Lake Charles, Gulf Coast, Gulf LNG, Elba Island

13. Commercial Issues Associated with N. American LNG Projects

14. Commercial Issues Associated with N.American LNG Projects • Development Funding -- • At risk • Consideration? • Equity • Tolling discount • Construction cost risk -- TSA signed before FID • Who takes risk of cost escalation during development? During construction? Is there risk sharing? Exit ramp? • Greater issue for greenfields than for expansions • Gas Supply • Tollers must obtain gas (SPA buyers need not) • Buy off grid, or dedicated source? (EPA issues?)

15. Commercial Issues Associated with N.American LNG Projects (con't) • Terminal Force Majeure risk • Customer continues to pay toll/fixed charge? • How long? Termination right? • Change in law or tax risk • TSA customers may bear this risk; SPA buyers rarely do • Multi-users • Inter-customer default/credit risk? • Are partial assignments permitted? • Pipeline • Who owns the pipeline, is there capacity available, and will an open season by required?

16. Commercial Issues Associated with N.American LNG Projects • Considerations upon Reconfiguring an LNG import Project as a Bi-Directional Facility • Need to navigate around existing regas customers -- literally and figuratively • Gas nominations, storage, and scheduling are more complex, less flexible • Effects on the associated pipeline to accommodate both imports and exports

17. LNG Regulatory Regime

18. Regulatory Regime • Regulatory Regime Overview • Satisfying regulatory requirements may require significant investment of time and resources. • In the United States, Section 3 of the Natural Gas Act ("NGA") governs construction of export facilities and export of LNG. • Primary regulatory authority under NGA: • FERC: LNG facility siting authority. • Department of Energy ("DOE"): Approval for exports of the commodity. • Pipelines governed by Section 7 of the NGA. • FERC: Regulation of pipelines.

19. Regulatory Regime • DOE Export Authorization • DOE required to authorize the export unless it finds the proposed exportation "will not be consistent with the public interest." • Exports to a country that has entered into a Free Trade Agreement ("FTA") with the United States deemed to be within the public interest. • Presently, only one license granted by DOE for LNG export to non-FTA countries. • Granted to Cheniere Energy. • 16+ applications pending

20. Regulatory Regime • Policy Issues • Dec. 5, 2012, DOE releases NERA study on LNG exports: • “Across all ... scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.” • Comments due Jan. 25; reply comments Feb. 24 • DOE to consider first those applications for which FERC has given approval to commence pre-filing for FERC license • EPA & Sierra Club urge DOE review of upstream impacts • Both FERC and the 2d Circuit Court of Appeals have rejected similar arguments

21. Final Remarks

22. Final Remarks • Sponsors should carefully consider their risk/reward posture, and that of their investors and lenders • Select the appropriate structure; changes later can increase costs, impede marketing, and cause delays in financing • Focus on obtaining creditworthy customers -- both capital and regulatory approvals are likely to follow strong financials • Align contract terms to reflect structure, comply with licenses, and promote project commercial and financial success

23. Final Remarks Presented By: Steven R. Miles Head of LNG Practice Baker Botts L.L.P. 1299 Pennsylvania Ave., NW Washington, D.C. 20004-2400 +1 202.639.7951 steven.miles@bakerbotts.com