By: Erin Moloney, Articles Editor

Liquified natural gas (“LNG”) disputes are rising due to increasing pressures from the global energy market following the Russian invasion of Ukraine, leading to price increases, an influx of arbitration, and environmental concerns. LNG, a natural gas and cleaner alternative to oil and coal, is rapidly increasing in demand. In 2021, Russia was the world’s largest gas exporter, supplying 45% of the EU’s demand. Following Russia’s invasion of Ukraine, severe sanctions influenced the UK, Italy, and Spain to diversify their gas exports and rely more on LNG from Qatar. Central and Eastern European countries initially faced challenges to swiftly diversify their gas supply because they lacked sufficient infrastructure to import LNG. However, Europe increased its geographic capabilities and remains the main destination for U.S. LNG exports.

Since 2023, the U.S. has emerged as the leading exporter of LNG, surpassing longstanding leaders Qatar and Australia. The U.S.’ role in LNG exports has helped countries reduce their reliance on Russian gas following international sanctions on Russia and increase trade relations while bolstering investment in U.S. infrastructure. However, the global increase in demand for natural gas sources has led to dramatic price increases, particularly in LNG. As a result of the continued increase in LNG exports, domestic natural gas prices have increased, greenhouse gas emissions have shifted overseas, and U.S. prices are now subject to global price fluctuations.

In response to LNG price increases, the LNG spot market, a market with contracts for immediate delivery in less than four years, has emerged. The spot market has become popular because prices can be fixed or tied to oil or gas in spot contracts. This has led law firms and U.S. government agencies to speculate that the profit incentives of terminating or breaching long-term supply agreements have influenced LNG producers to sell directly to the spot market. As a result, LNG customers have increasingly brought arbitration claims against suppliers for breach of long-term agreements.

LNG price fluctuations exacerbated by Russia’s invasion of Ukraine have already triggered arbitration claims worth U.S. $2 billion against U.S. supplier Venture Global LNG. Several customers including BP, Repsol, Shell, and Edison have initiated separate arbitrations against Venture Global for failure to deliver LNG under long-term supply agreements. Customers allege that Venture Global has chosen to breach agreements, opting to sell to different customers at higher prices through spot contracts. To escape liability, Venture Global alleges that the commercial operation of the plant has been delayed due to “extensive repair” of the power supply facility. In response, BP and Shell have asked the EU-US Task Force on Energy Security to intervene in the dispute as Venture Global’s opportunistic conduct exacerbates an energy crisis affecting the lives of European citizens.

As Venture Global fails to honor supply contracts, various consumers continue bringing arbitration claims against Venture Global such as Polish oil and gas firm Orlen, Chinese state-owned Sinopec, and Portuguese oil company Galp. Energy-related arbitrations show no sign of easing up, and LNG suppliers should be prepared for shifting policies that could affect their business.

There has also been an increasing number of arbitral disputes brought against global LNG suppliers wherein suppliers fail to comply with long-term supply contracts. For instance, an Indian state-owned gas company, GAIL, filed a $1.8 billion claim at the London Court of International Arbitration (“LCIA”) against former Russian-owned natural gas exporter Gazprom for failing to supply contracted shipments of LNG. Originally, GAIL signed a contract with Gazprom, but following the Ukraine invasion, the German government took control. Supplies were hindered as the German government prohibited the company from picking up any cargo from Russia. Furthermore, Japanese LNG producer Inpex is expected to supply around 10% of Japan’s LNG requirements over the next four decades but is facing several arbitration disputes. For example, Inpex settled a $600 million International Chamber of Commerce (“ICC”) dispute with Samsung Heavy regarding delays to the construction of a floating offshore gas processing unit. Inpex also filed a $970 million arbitration claim for delays and defects of a storage facility against Daewoo Shipbuilding & Marine Engineering. Additionally, Uniper, a German energy group, was ordered to pay Italian LNG supplier, Eni, €550 million in an ICC price review claim under a long-term contract. 

Environmental groups and the U.S. government are concerned that the upsurge of LNG exports conflicts with U.S. climate commitments. Although LNG emits less carbon dioxide than coal and oil, LNG emits significant amounts of methane, a greenhouse gas eighty times more potent than carbon dioxide in the short term and thirty times worse in the long term. Ben Cahill, Senior Fellow at the Center for Strategic and International Studies (“CSIS”), states that the key question in LNG exports is “whether the U.S. Department of Energy (“DOE”) and the Federal Energy Regulatory Commission need to change the way they consider proposed export projects.” Environmental concerns tied to increased export of U.S. LNG pose a looming question of the role of the U.S. as a fossil exporter in a decarbonizing world. These issues and circling environmental policy debates expose fault lines in U.S. foreign policy and U.S. business commitments, leading to increased arbitration disputes.  

On January 26, 2024, the Biden-Harris Administration announced that it would stop approving new LNG exports to nations without free-trade agreements (FTA). The Administration reasoned that the current economic and environmental analysis DOE uses to justify its LNG export authorizations is five years old. New analysis must account for energy cost increases and the impact of greenhouse gas emissions. Furthermore, last April DOE also sought to incentivize better environmental practices by refusing to extend non-FTA export authorizations beyond an initial seven years unless LNG suppliers are undergoing construction on their facilities and encounter extenuating circumstances. These policies seek to incentivize LNG suppliers to engage in safer environmental practices. However, the LNG export pause allows LNG exporters to bring arbitration claims seeking compensation from DOE if they believe the agency discriminates against their project.

“Arbitration continues to stand as a superior mechanism for settling LNG disputes as economic and environmental policy considerations evolve by allowing contracting parties to mitigate uncertainty through explicit contracts that provide room for renegotiation in instances of change.”

Erin Moloney

Other LNG-rich countries are experiencing patterns similar to the U.S. In Australia, the increase in prices has led Australian producers to increase LNG exports, which has resulted in the Australian Government’s proposed reform to the Domestic Gas Security Mechanism (“ADGSM”) in April 2023. This new policy gave the government control over the export of LNG to meet the domestic demand. As of December 2023, the Australian Government decided not to activate the ADGSM for the April to June 2024 quarter. This means that the government is confident that Australia’s gas storage and market are equipped to supply southern markets and that any supply shortages can be addressed by reducing gas exports. However, these limits on LNG exports can also cause LNG exporters to bring force majeure arbitration claims against the government in the case that they can no longer meet contract obligations.

Companies seeking relief from LNG exporters failing to comply with long-term agreements, may be frustrated by the U.S. government’s reconsideration of LNG export agreements due to environmental and economic concerns. However, the House of Representatives passed H.R. 7176 (Unlocking our Domestic LNG Potential Act of 2024) on February 15, 2024 to remove the pause on LNG exports and provide the Federal Energy Regulatory Commission (“FERC”) sole jurisdiction to determine whether exports are in the public interest. This is the third time in the 118th Congress that this legislation has been considered on the House floor. These legislative actions provide LNG exporters an opportunity to continue performing under contractual agreements and potentially avoid arbitral disputes.

In the meantime, stakeholders should review their contracts and readdress their capabilities, given these evolving policy restraints on the market. Arbitration continues to stand as a superior mechanism to settle LNG disputes as economic and environmental policy considerations evolve by allowing contracting parties to mitigate uncertainty through explicit contracts that provide room for renegotiation in instances of change.