LNG construction arbitration – From the beginning to the end



Global Publication October 2018

LNG comprises approximately 9.8 percent of the world’s energy supply.1 It is an important and growing part of the global energy mix: in 2017 the global LNG trade set a record of 293.1 million tonnes (MT), an increase of 35.2 MT (or 12 percent) from 2016, which itself was a record year. 2018 is expected to see a further record. The expansion of LNG has led to an increase in LNG related production and delivery projects including: (i) liquefaction projects (onshore and floating); (ii) LNG carriers; and (iii) LNG receiving projects (i.e. storage and regasification projects both onshore and floating).

This expansion is expected to continue. There is 92 MT per annum (MTPA) of liquefaction capacity actively under construction in 2018 which is a significant increase to the existing nominal liquefaction global capacity of 369.4 MTPA. 24 new LNG carriers entered the global fleet in 2017 bringing the total fleet to 478 plus a further 106 on order, which amount to an increase of 18 during the course of 2017. Further to this, 87.7 MTPA of LNG receiving capacity is actively under construction in 2018, again a significant increase to the existing global receiving capacity of 851 MTPA.

LNG project costs are increasing

The scale and costs of LNG projects are substantial and growing. For example, the International Gas Union’s (IGU) 2018 World Gas LNG Report records that the global average liquefaction unit costs for greenfield projects between 2009 to 2017 increased by approximately 250 percent (to US$1,005/tonne) compared to the period between 2000 to 2008. The global average masks significant regional variations, with the costs for Pacific Basin projects increasing by nearly 400 percent in the same time frame (to US$1,458/ tonne). As a rough guide, liquefaction costs comprise approximately 75 percent of the overall capital expenditure on an LNG supply chain, with shipping costs and receiving regasification costs comprising approximately 15 percent and 10 percent respectively.

LNG project characteristics and risks

LNG projects possess characteristics and risks that tend to amplify the potential for high value disputes. Such projects are highly technically challenging (including Floating LNG technology) and require a myriad of sub-contractors, often based across multiple jurisdictions. They are environmentally sensitive and subject to stringent regulatory requirements. LNG projects are often politically sensitive and subject to significant public scrutiny. LNG projects involve very significant upfront capital expenditure, with essentially no income generation prior to project commissioning. Moreover, the overall viability of an LNG project, which may have an expected lifetime exceeding 30 years, will often depend upon the long term stability and predictability of regulatory, political and economic environments.

For liquefaction and regasification projects in particular, the risks associated with them include: project economics, environmental approvals and regulation, political risks, joint venture risks, technical engineering, procurement and construction challenges, feedstock challenges and end product marketing and contracting.

All of the above risks can impact heavily upon an LNG project and lead to disputes. Successfully addressing disputes efficiently can be critical to prospects of a given project.

Project life-cycle risks and challenges

There are a number of stages to an LNG project, which commonly include the following: (i) planning and regulatory approvals; (ii) front end engineering and design (FEED); (iii) EPC construction; (iv) commissioning and handover; and (v) post commissioning operations and price reopeners. Each of these stages presents potential contentious risks and challenges for the parties involved. For example: During the planning and approvals stage, extensive engagement will be required with the relevant legislative and regulatory regimes and the governmental decision making process may be lengthy, complex and lack transparency. In certain circumstances domestic administrative review procedures or investor protections under bilateral or multilateral investment treaties may become at issue.

  • During the FEED stage, the precise parameters and scope of the design work being undertaken, together with the accuracy and quality of the design output will be important to: (i) determine the overall project scope and potential disputes that may arise during the construction stage; and (ii) reduce disputes between the FEED contractor and the EPC contractor that risk delaying the project and/or may in effect, re-allocate performance risk.
  • The EPC construction stage is subject to numerous technical and execution risks that may result in significant additional costs and/or delays. The management of change order requests, claim notification and time bar provisions, the imposition of liquidated damages, statutory adjudication regimes and waterfall dispute resolution processes, all require careful attention.
  • The commissioning and handover stage raises risks in terms of technical complexities, as well as contractual risks derived from delays in commissioning and from potential “take or pay” obligations incurred in relation to commissioning cargoes.

Finally, the operations phase may be subject to price reopener provisions (such as a gas price review provision) which can significantly change the economic value of LNG supply agreements as between the buyer and seller.

Frequently, the forum of choice for resolving many of such disputes will be international arbitration.

Project life-cycle contentious risk management

With the increase in number and value of LNG construction projects, no doubt the number of LNG construction related arbitrations is set to rise. Disputes can however be ameliorated with appropriate contentious risk management during the project life-cycle.

In terms of contentious risk management, especially during the construction phase, parties should keep a number of issues in mind including the following

  • Ensuring strong integration between in-house counsel team/external counsel team and the project team so that contentious issues are actively managed from a commercial and legal perspective, both of which are both necessary in long term projects. This includes ensuring contractual change order/variation processes are properly followed and rights reserved where appropriate.
  • Ensuring project team members are aware of how rights can be inadvertently waived or lost through correspondence (e.g. the risks of informal email or other communications).
  • Ensuring the contractual effect of claim notice provisions and time bar clauses are not inadvertently waived or otherwise rendered potentially ineffective due to conduct giving rise to an estoppel.
  • Ensuring privileged communications are properly conserved and privilege is not inadvertently lost. Particular care is needed where communications are shared with shareholders in the project, including when escalating disputes are reported to management or shareholders.
  • Ensuring that dispute resolution escalation provisions are followed within the agreed time limits or rights are reserved where commercially it would be appropriate to adjust the process.
  • Ensuring the documentary record in relation to contentious issues is kept up to date and preserved. If a formal, electronic contract communication system is required, it is important that parties use it and abide by its protocols.
  • Ensuring/preserving continued access to key project team members and their records who may become important witnesses in the event of a dispute.
  • Considering whether the use of a dispute advisory board may assist in the timely identification and resolution of contentious issues. Similarly, considering whether a mediation process, neutral evaluation process or other alternative dispute resolution process may assist in the early resolution of disputes and the preservation of commercial relationships.
  • Considering whether the early retention of an external expert may assist in narrowing or resolving contentious issues at a preliminary stage.


LNG projects across the LNG cycle are of growing importance to the world’s energy supply. They are costly, long term projects that come with substantial technical, economic and political risks all of which heighten the risk of disputes throughout the project life cycle. While prevention is better than cure, careful and proactive management of the circumstances giving rise to contentious issues and disputes is a critical element in any LNG project.



Unless otherwise noted, all figures in this article are taken from IGU 2018 World LNG Report.


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