Negotiating Australia’s first LNG export contract

Shane McCarthy, 2010.

Shane McCarthy, 2010.

Australia has been supplying Asia with LNG since 1989. Katherine St Lawrence interviewed former Shell lawyer Shane McCarthy, now retired, about his experience negotiating the contract that delivered Australia’s first ever LNG exports.

Shane McCarthy started his career with Shell in 1971 after completing his law degree at the University of Melbourne in 1963. In 1978, Shell posted Mr McCarthy to London, where he worked on ship chartering, oil trading, and natural resource development, in particular LNG.

It was here that Mr McCarthy gained a basis of experience in negotiating LNG sales contracts.

“I worked on the Brunei and Malaysian projects in 1980. At that stage, the first Malaysia LNG Project was getting going and I helped develop a sale and purchase agreement with the buyers, getting it in final shape to go to the board of the Malaysia LNG company.”

In 1979, the sellers from the North West Shelf Project were starting to develop a relationship with some Japanese buyers, who eventually came up with an eight-buyer consortium: Tokyo Electric Power, Chubu Electric Power, Kansai Electric Power, Chugoku Electric Power, Kyushu Electric Power, Tokyo Gas, Osaka Gas and Toho Gas.

“I started advising on the Memorandum of Intent (MoI) from London in that year, and when I moved back to Australia, I brought the first draft of the contract with me,” Mr McCarthy says.

The MoI was signed on Bastille Day, 14 July 1981.

Gas on the North West Shelf

In the 1970s, the North West Shelf Joint Venture (NWS JV) participants discovered vast quantities of natural gas and condensate on Australia’s northwest continental shelf. The first development of the NWS Gas Project began in 1980 with the construction of the Karratha Gas Plant and a jetty for the loading of LNG and condensate. Domestic gas supply from the project to Western Australia began in 1984.

In 1985, Woodside began construction of the first two LNG processing trains and four LNG storage tanks at the Karratha plant. The first LNG train was commissioned in 1989, and four additional trains have subsequently been brought online.

Process of negotiation

Mr McCarthy’s visits to Japan during the negotiations ranged from a few days to up to six weeks, and were an intense mix of work and socialising.

He quotes an American colleague who said, “We work hard, we play hard, and one justifies the other.”

Because there were eight buyers and, ultimately, six sellers, the Japanese recognised that having representatives from every buyer would be unwieldy. The buyers were jointly represented by just four companies, called the secretariat buyers. So meetings consisted of the secretariat buyers, the sellers, Mitsubishi & Mitsui as sellers’ helpers, and Nippon Oil as an advisor to Chevron. Negotiation meetings usually involved a roomful of 30–35 people. At the buyers’ request, the sellers were represented by one speaker.

A total of 48 separate contracts were negotiated between the parties, though Mr McCarthy says they were almost identical and in practice, they functioned as one.

He says that initially, buyers were mistrustful of negotiating with sellers from a joint venture. For contracts on previous projects, buyers would deal with a company set up to sell the LNG. The Malaysia LNG Project set up a separate company to market the LNG, so the buyers dealt only with one seller.

The original NWS LNG contracts has a price clause which looks forward to negotiation when deliveries would start, and eventually the sellers developed a series of rolling five-year price contracts.

The details of the price contracts, Mr McCarthy said, were too confidential to talk about with us.

“Mostly, when commercial things like price were under negotiation, the number of people in the room diminished dramatically.

“They said to the lawyers, ‘You can go and have a holiday.’ So we did! A lawyer from BP and I went down to Kamakura for the day.”


The first big point of negotiation, Mr McCarthy says, was the shipping arrangements. The MoI had left open who would do the shipping, and the sellers recognised that there was a Japanese interest in shipping.

Mr McCarthy says the main concern when negotiating the shipping of LNG is timing.

“In the past, iron ore had been sold on a free-on-board basis. Buyers send their ships to the port to load the product. If they don’t want the iron ore, they don’t send the ships.

“That would be intolerable in an LNG project, where everything works to extremely fine tolerances. So we

wanted to be able to control the shipping,” he says.

“Our original preference was for CIF shipping – cost, insurance and freight.”

Under CIF, the seller loads the product onto a ship, and the ship owner issues the seller with a bill of lading, which acknowledges that goods have been received on board as cargo. The ship owner acts as custodian of the product on the voyage, and the transfer of the bill of lading then transfers ownership of the cargo from seller to buyer at some point during or after the voyage.

“But the buyers said, ‘We don’t have a relationship with the ship owners, so we want you to bring the gas to our ports.’

“That kind of a sale is called an ex-ship sale, which means the buyer takes delivery when the product is discharged from the ship.”

The buyers’ interest in shipping was satisfied by a complicated arrangement for providing ships through charter parties. Japanese ship owners chartered two ships into the NWS project and they became the sellers’ ships, and both the ships were built in Japan.

Will you marry us?

Gas liquefaction was a proven technology by the 1960s, with Malaysia LNG and other suppliers already supplying gas to Japan, and further projects proposed in the Middle East, Indonesia and Canada.

Mr McCarthy explains that other projects were not necessarily competitors to NWS LNG.

“Because of the nature of the MoI and the commitment it involved, there wasn’t competition in the sense of people beating at the door, looking for the same tranche of business.”

“Once we’d signed the MoI, we knew that unless something serious broke down, we would have a deal.”

Mr McCarthy calls the contract a sort of marriage, and the MoI was “like an engagement.” This commitment was expressed to Mr McCarthy on a number of occasions during negotiations.

“I rode from the airport with one of our Mitsubishi advisors, and on the way we started talking about the process and the project and where it was at, and so on.

“The Mitsubishi advisor said to me ‘You know, they’re not really negotiating the contract with you. They’re negotiating to get to know you better.’

“After one meeting in the early 1980s, I was standing outside a lift with one of the Japanese representatives and I asked him how the North West Shelf contract was shaping up compared with the deal they were working on for Dome Petroleum’s Western LNG Project in Canada.

“He said, ‘Compared with the Dome project, we have one divorce, one marriage.’ And I knew which was the marriage!

“It didn’t mean that we didn’t have a hard negotiation on every word in the contract. It’s probably the most comprehensively and thoroughly negotiated contract I’ve ever worked on.

“It took until 1985 to sign the contract because we were not just drawing up a contract, we were developing a relationship, and we wanted to make the document as good as the relationship,” Mr McCarthy says.

“The spokesman for the sellers addressed the group at one point and said, ‘Before we were two teams negotiating one contract. I can say now that we are one team.’ And boy, did the Japanese like that. The relationship was solid.

“It still breaks me up to think about– the negotiation was a very emotional process.”

Mr McCarthy uses the Brunei LNG Project to illustrate the strength of the seller-buyer relationship with Japanese clients. Offtake from the Brunei project was contracted to TEPCO and Osaka Gas at a fixed price in 1969, as opposed to the NWS contracts, which had five-year rolling price contracts.

“In 1973, the first oil shock occurred and the price of oil went through the roof. LNG prices are very strongly linked with oil prices, and so the Brunei project was left basically stranded because it was on a fixed LNG price.

“But, the buyers and the seller came together and the buyers agreed to an increase. They didn’t have to, but they did, because the Japanese don’t like contracts or relationships where there is one winner and one loser. They like it to be mutually beneficial – win-win.”


Mr McCarthy says the biggest change in the LNG market now compared with the 1980s is the development of a spot market.

“We had some occasional spot sales of LNG; the biggest customer was Enagas, the Spanish company. At one point we were supplying 10 per cent of Spain’s gas requirements.”

The NWS project has also supplied LNG to Louisiana, USA, to Korea Gas Corporation, to Turkey, and to other Japanese buyers as well.

Mr McCarthy’s advice to companies looking to negotiate future LNG supply contracts is to be honest.

“Honesty is so important if you’re building a relationship based on trust. There is even a clause in this contract referring to trust and understanding. That is very uncommon in Western contracts, but it reflects the fact that we were negotiating a cross-cultural relationship.”

The North West Shelf Venture participants today are BHP Billiton Petroleum (North West Shelf), BP Developments Australia, Chevron Australian, Japan Australia LNG (MIMI), Shell Development (Australia), and Woodside Energy as operator.

Currently, all participants have an equal one sixth share in the project.

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