The LNG sector is seeing a steep rise in legal disputes as the industry grows and fragments, according to leading players.

Historically, the gas market has been relatively stable, with a select group of participants like energy majors, traders and producers like Qatar Gas engaged in long-term supply contracts.

The close relationships of those industry giants meant there was little appetite for entering into legal disputes and any issues that did arise were generally resolved amicably, law firm HFW said.

Its lawyers believe those sleepy days are long gone, however.

Andrew Williams, a partner in the commodities group at HFW, told TradeWinds: "We are already seeing more disputes than we have previously."

Short-term deals equal more problems

Long-term contracts with large capital expenditure meant that negotiations often took some considerable time and were project-based, in contrast to the more short-term trades which are negotiated much more quickly now.

The "sophisticated" players generally knew what they were doing, Williams said, with fewer disputes as a consequence.

But dating from around 2010, shale gas in the US has been a "real game-changer."

The US was gearing up to be an importer of gas and then those terminals were quickly switched to export.

The US is due to overtake Qatar as the number one exporter in the coming years.

And LNG's growing profile as a "cleaner" fuel is driving rapid growth in the market – particularly in Asia.

There are now more suppliers, more players, and more spot deals instead of longer term supply contracts.

"Disputes will inevitably increase with more players in the market, more short term trades and more vessels on the water," Williams said.

Contract "daisy chain"

Given LNG is now more actively traded, disputes will inevitably arise from delays caused by issues such as weather delays, equipment failures or shipping problems, especially where the cargo is in a daisy chain of contracts, he added.

Whilst LNG ships are predominantly new, advanced vessels, compared to traditional vessels, problems can still occur.

Technical issues and equipment failures inevitably arise. The advent of IMO 2020 is also bringing its own problems regarding bunkering and the redelivery of vessels on long-term time charter, TradeWinds is told.

Then there can be issues over "heel", which is the LNG left in a vessel after discharge used to cool down the tanks prior to loading.

Too much heel being retained can limit what volumes can be loaded and lead to short deliveries.

HFW is dealing with a couple of arbitration cases at the moment, which are confidential.

One of the problems with arbitration is that it does not assist with the development of English law as the awards are confidential, TradeWinds is told.

"Nearly all the contracts I see have arbitration clauses because parties want to keep their contracts and subsequent disputes confidential, especially around pricing," Williams said.

"Prices are falling primarily due to oversupply. This will bring its own challenges with some parties wishing to exit contracts and inventing excuses to escape performance, such as force majeure."

HFW believes a well-drafted contract is key, but contracts cannot necessarily provide for all eventualities, particularly when shipping plays such a large part in the LNG industry.

Performance claims an issue

One LNG shipping executive told TradeWinds: "There will be more cases and we are already seeing it on performance claims which for some charterers have become a profit centre. Some charterers are really tough on this."

The source added that IMO 2020 fuel questions are mostly applicable to the Q Max and Q Flex ships, as they don't burn LNG.

He had not heard of specific cases relating to "heel" issues though.

Regarding force majeure, he said there is definitely more focus on demurrage claims now.