Understanding Gas Sales and Purchase Agreement

 

What is GSPA?

A Gas Sales and Purchase Agreement (GSPA) is a contractual agreement between a buyer and a seller for the sale and purchase of natural gas. This agreement outlines the terms and conditions governing the transaction, and it is a crucial document in the energy industry.

A GSPA is typically prepared and agreed upon during the development and planning stages of a natural gas project. The timeline for the preparation and agreement of a GSPA is closely tied to the overall project life cycle.

When do we need GSPA?

General overview of when the GSPA is usually prepared and agreed upon in the context of an entire project is as below.

1. Project Development Phase:

• Identification of Resources: In the early stages of a natural gas project, the developers identify and assess potential gas reserves. This phase involves geological studies, exploration, and resource estimation.

• Project Feasibility: Once the potential resources are identified, developers conduct feasibility studies to assess the economic viability of extracting and selling the gas. This includes considerations such as infrastructure requirements, transportation logistics, and market demand.

2. Negotiation and Agreement Stage:

• Commercial Negotiations: Following the feasibility studies and as the project progresses, negotiations begin between the gas producers (sellers) and potential buyers. These negotiations involve discussions on pricing, quantity, quality, delivery terms, and other commercial aspects.

• Preparation of GSPA: Based on the outcomes of negotiations, legal and commercial teams from both parties work on drafting the Gas Sales and Purchase Agreement. This document outlines the specific terms and conditions of the gas sale, addressing the interests and concerns of both the buyer and the seller.

• Due Diligence: Before finalizing the GSPA, both parties may conduct due diligence to verify the technical, financial, and legal aspects of the project. This helps ensure that the terms of the agreement are realistic and achievable.

3. Project Financing:

• Securing Financing: The GSPA is an essential component for securing project financing. Lenders often require a secure market for the gas produced as part of the financing conditions. The agreement provides assurance to lenders that there is a committed buyer for the gas.

4. Final Investment Decision (FID):

• Project Approval: Once negotiations are complete, due diligence is conducted, and financing is secured, the project sponsors make the Final Investment Decision (FID). This is the point at which the project officially moves from planning to execution.

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• Signing of GSPA: The Gas Sales and Purchase Agreement is signed by the parties involved at or around the time of the FID. The signing of the GSPA is a significant milestone, and it solidifies the commercial arrangements for the sale of gas throughout the project's life.

5. Construction and Operations:

• Project Implementation: With the GSPA in place, the project moves into the construction phase. Infrastructure, such as extraction facilities and transportation systems, is built to extract and deliver the gas.

• Commercial Operations: Once construction is complete, the project transitions to the operational phase. Gas deliveries to the buyer commence according to the terms outlined in the GSPA.

What is Covered in GSPA?

Typical elements included in a GSPA may cover below items while specific details can vary depending on the project.

1. Parties Involved:

• Identification of the buyer and the seller.

2. Quantity and Quality of Gas:

• Specifications regarding the quantity of gas to be sold and purchased.

• Quality specifications for the gas, including any required standards.

3. Price and Payment Terms:

• The pricing mechanism, which may include fixed prices, indexed prices, or a combination.

• Payment terms, including invoicing and settlement procedures.

4. Delivery Point and Transportation:

• Specification of the delivery point (location where the gas will be delivered).

• Transportation arrangements, which may involve pipelines or other means.

5. Term of Agreement:

• The duration of the agreement, specifying the start date and, if applicable, the end date.

6. Force Majeure:

• Clauses outlining circumstances under which either party may be excused from performance due to events beyond their control.

7. Liabilities and Indemnities:

• Allocation of risks and responsibilities between the buyer and the seller.

• Indemnification clauses for any losses incurred during the course of the agreement.

8. Termination Provisions:

• Conditions under which the agreement can be terminated by either party.

9. Dispute Resolution:

• Procedures for resolving disputes between the parties, which may include arbitration or other mechanisms.

10. Governing Law:

• The jurisdiction whose laws will govern the agreement.

11. Insurance:

• Requirements for insurance coverage related to the gas transaction.

12. Confidentiality:

• Provisions regarding the confidentiality of information exchanged between the parties.

Throughout the project, the Gas Sales and Purchase Agreement serves as a binding contract, providing the framework for the commercial aspects of the gas transaction. It is essential for aligning the interests of the buyer and the seller, managing risks, and ensuring the economic success of the project.