BP Gas Marketing Ltd v La Societe Sonatrach & Anor, Court of Appeal - Commercial Court, October 07, 2016, [2016] EWHC 2461 (Comm)

Resolution Date:October 07, 2016
Issuing Organization:Commercial Court
Actores:BP Gas Marketing Ltd v La Societe Sonatrach & Anor
 
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Neutral Citation Number: 2016 EWHC 2461 (Comm)

Case No: CL-2014-000844

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 7 October 2016

Before :

SIMON BRYAN QC

(Sitting as a Deputy Judge of the High Court)

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Between :

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Nigel Eaton QC (instructed by Holman Fenwick Willan LLP) for the Claimant

Christopher Harris and Georges Chalfoun (instructed by Bracewell (UK) LLP) for the Defendants

Hearing dates: 18, 19, 20, 21, 25, 26 and 27 July 2016

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Judgment Approved21

MR SIMON BRYAN QC (Sitting as a Deputy Judge of the High Court):

A. INTRODUCTION AND BACKGROUND TO THE DISPUTE

  1. This action is concerned with the proper construction of clause D2.2.2(ii)(b) of a Joint Shipper's Agreement ("JSA") entered into on 28 June 2005 between the Claimant, BP Gas Marketing Limited ("BP"), and the First Defendant La Societe Sonatrach The Second Defendant, Sonatrach Gas Marketing UK Limited, became jointly and severally liable with the First Defendant under the JSA by accession in 2009 (the Defendants are collectively referred to in this judgment as "Sonatrach").. Clause D2.2.2(ii)(b) of the JSA provides that nitrogen costs (which includes power used to generate nitrogen) allocated by Grain LNG Limited ("Grain") to BP and Sonatrach (together defined as the Shipper), in respect of nitrogen added to cargoes of Liquefied Natural Gas ("LNG") LNG is created by cooling natural gas to around -160oC. So cooled, the gas liquefies and reduces in volume by around 95%. It can be transported and stored in this state, before being re-gasified when required.

    imported through Grain's terminal, shall be allocated between BP and Sonatrach according to a formula as there set out.

  2. It is the proper construction of that formula, and one element within it, namely a figure of 51.41, that gives rise to the issues that arise for determination in this action. In order to understand the issues that arise (which are defined in section B below) it is first necessary to set out something of the background to the dispute.

  3. The Isle Of Grain, which is situated on the Medway Estuary, is home to a gas terminal (the "Terminal") operated by Grain, a National Grid company. The Terminal was, until 2002, a peak shaving terminal, used to supply gas to the national pipeline system during peak use periods, and storing gas as LNG when not required. It was not an import terminal and did not have facilities for berthing or unloading of vessels. The gas which the Terminal stored was North Sea gas which came to it through Transco's National Transmission System (the "NTS").

  4. In 2002, Grain started converting the existing plant into a Terminal for discharging LNG from ocean-going tankers, storing it in tanks on-site, and then converting it back into gas to be sent it out into pipelines for distribution to domestic and commercial consumers. The Terminal came into operation in 2005. At that time, it was the only import and regasification terminal in the UK. There was accordingly no track record as to how the Terminal would be operated (including, for present purposes, in relation to the Terminal's practices concerning the addition of nitrogen to LNG to alter its composition), which provides the backdrop to the dispute between BP and Sonatrach, as to how costs charged by Grain in relation to nitrogen are to be allocated between BP and Sonatrach.

  5. In October 2003, BP and Sonatrach jointly contracted for the use of the Terminal's initial discharge, storage, re-gasification and send-out capacity under a 20-year Specific Terms Agreement ("STA"). "STA" will be used in the judgment to include subsequent amendments and additions thereto (the STA is also called the "Services Agreement" in some documents). BP and Sonatrach had to tender (and thereafter contract) jointly because the Phase 1 capacity was not sufficient to split between the two shippers - the capacity was around 192,000m3 and the LNG tankers available at the time had a capacity of around 155,000m3 with the result that a right to half the capacity (100,000m3) would not have allowed either shipper to unload a full cargo. In their relations with Grain, BP and Sonatrach are accordingly treated as a single shipper.

  6. Grain later twice expanded the Terminal. The original capacity, which is covered by the STA, is known as Phase 1. The additional capacity is divided into Phases 2 and 3. Sonatrach contracted for some Phase 2 capacity. BP is not involved in Phases 2 or 3.

  7. Although BP and Sonatrach contracted jointly with Grain, they act severally in sourcing LNG and import from different countries. Like oil, LNG is a blend of hydrocarbons. The blend differs from source to source (in terms of the precise amounts of methane, propane, nitrogen and other gases it contains). So LNGs from different sources have different properties.

  8. The LNG property which is most relevant to this case is the Wobbe number (or index). In simplistic terms, Wobbe is a measure of an LNG's energy by volume. It is expressed in megajoules per standard cubic metre (MJ/m3). More precisely, Wobbe is an LNG's higher heating value divided by the square root of the LNG's specific gravity, the specific gravity being the ratio of the density of the LNG to the density of air: Wobbe = HHV/vSG.

  9. The UK gas transportation infrastructure is built on two separate, but connected, gas transmission (pipeline) systems, namely Transco's National Transmission System (the NTS), and Local Distribution Zones ("LDZ"). The NTS is a high-pressure system for transmitting large volumes of gas over long distances to large users, e.g. power stations. The LDZ are lower-pressure systems for transmitting gas to users in the vicinity of a plant. The Terminal is connected to both systems.

  10. There are a number of parameters which apply to gas entering the NTS and the LDZ. These are largely set out in the Gas Safety (Management) Regulations 1996 (the "GSMR''). These include that the Wobbe index value of the gas cannot be lower than 47.2MJ/m3 or higher than 51.41MJ/m3. The UK infrastructure was developed around North Sea gas which is at the very lean end of the spectrum of gas produced worldwide.

  11. Under the STA, BP and Sonatrach contracted that LNG would comply with the regulatory limits at the point of discharge into the Terminal, and Grain contracted that gas (i.e., regasified LNG) would comply at the point of send-out from the Terminal. In this way, the 51.41 Wobbe limit was written into the STA.

  12. The upper value of 51.41MJ/m3 is very low by international standards, and was potentially problematic for BP and Sonatrach as most international sources produce LNG with a Wobbe above 51.41. However, there is a solution, namely to add nitrogen to the gas. Adding nitrogen increases the density of the gas but lowers its energy value since nitrogen has no heating value, and in consequence the Wobbe of the LNG/nitrogen blend is lower than that of the original LNG.

  13. By a First Letter Agreement ("FLA") concluded in November 2004, Grain agreed to arrange nitrogen facilities at the Terminal to ensure that LNG discharged under the STA met the 51.41 limit on send-out. BP and Sonatrach agreed to bear the costs. This arrangement meant that the Wobbe limit at point of discharge into the Terminal could be relaxed.

  14. Following the Award of the Phase 1 capacity in October 2003 BP and Sonatrach discussed the necessary arrangements between themselves. BP and Sonatrach originally contemplated creating a joint venture entity for their joint use of Phase1, but ultimately in June 2005, when the Terminal was about to become operational, BP and Sonatrach concluded a Joint Shipper's Agreement (the JSA), under which this dispute arises.

  15. The JSA regulates the use of the Phase 1 capacity as between BP and Sonatrach (as opposed to between BP/Sonatrach and Grain, which is regulated by the STA). Amongst other matters, it regulates how costs and charges which Grain passes on under the STA are allocated between BP and Sonatrach. One such cost is nitrogen (including power used to generate nitrogen).

  16. The JSA deals with the monthly allocation of nitrogen costs at D2.2.2(ii). The JSA also provides for annual reconciliations of nitrogen costs by the same basic method, but using annual values instead of monthly values. D.2.2.2(ii)(a) allocates fixed nitrogen costs 50/50. The dispute that has arisen between BP and Sonatrach concerns the proper construction of clause D2.2.2(ii)(b) which calculates a party's allocation of variable nitrogen costs according to a formula.

    The formulae in D2.2.2(ii)(b)

  17. Clause D2.2.2(ii) is in the following terms:

    ``Nitrogen Costs shall be allocated as follows, by reference to all relevant terms as they are defined in, and by measuring all relevant units in accordance with, the Services Agreement and the document entitled "GLNG - Agreed Network Entry Provisions" dated 20 June 2003 and initialled on behalf of GLNG and the Shipper:

    (a) the fixed component of nitrogen costs allocated by Grain to the Shipper shall be borne equally by the Co-Shippers; and

    (b) subject to Section D2.2.2(ii)(c) the variable component of nitrogen costs allocated by Grain to the Shipper shall be allocated in accordance with the quantity of gas Sent Out and the quality of the LNG delivered by each Co-Shipper (the delivering Co-Shipper) as follows:

    XMA = TCM x TN2A

    TN2A + TN2B

    Where:

    XMA is the cost of nitrogen to be borne by a delivering Co-Shipper with respect to a month (M);

    TCM is the total cost of nitrogen with respect to the month (M)

    TN2A is the quantity of nitrogen used by the delivering Co-Shipper in the month (M)

    TN2B is the quantity of nitrogen used by the other Co-Shipper in the month (M)

    where each of TN2A and TN2B is calculated as the product of:

    (i) gas...

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