UK P&I Club informs on the contractual implications of the global Liquefied Natural Gas (LNG) market that is going through transformations driven by geopolitical tensions, evolving trade routes and shifting demand patterns.
According to UK P&I, the geopolitical landscape has a profound impact on LNG contracts. Regional conflicts, such as those in the Middle East, have heightened security risks for LNG carriers. Due to attacks on the Red Sea by Houthi rebels, the traffic for LNG carriers transiting the area has had a major fall. In February and March of 2024 no LNG ships passed through the Red Sea due to the escalated attacks.
Furthermore, these risks necessitate the inclusion of specific contractual provisions to mitigate potential disruptions. Key contractual provisions to consider include trading limits, sanction clauses, designated entities clauses, war risks, piracy clauses and force majeure.
War risk clauses are also common in charterparties and need to be closely considered if the vessel is operating in affected regions.
In addition, there are several operational considerations that should be addressed in LNG contracts. One critical aspect is the calorific value of LNG compared to fuel oils. To tackle this issue, it is essential to negotiate a post-delivery review period when entering into a time charter for a new-build ship with performance warranties lifted straight from the shipbuilding contract. This review period will allow for adjustments to the warranties to reflect the actual performance of the ship.
Moreover, another operational consideration is the risk of fuel oil deteriorating on board. Cheaper LNG means using LNG storage as bunkers while fuel oil is still on board. Traditional charterparties do not deal with such circumstances. This concern can lead to contractual disputes if not adequately addressed. Parties might consider including contractual provisions allocating responsibilities between owners and charterers if fuel oil is kept on board for a long time.
Among others, issues such as allocation of risk when adding special additives to the fuel oil on board, debunkering and associated costs should be addressed.
On the topic of global sanctions, it is crucial for contracting parties to undertake due diligence on any parties that might be involved to ensure they are not sanctioned, thereby avoiding the triggering of the sanctions clause.
