For many years the Short Term Flat NBP Trading Terms and Conditions 1997 (the “NBP 1997 Terms”) have been the standard terms for trading gas on the UK’s national transmission system for natural gas (the “UK NTS”) and the Standard Terms and Conditions for the Sale and Purchase of Natural Gas for UK Short Term Deliveries at the Beach 2000 (the “Beach 2000 Terms”) have been the standard terms for trading gas for delivery at entry points to the UK NTS.
While both sets of terms are used on a stand-alone basis, the NBP 1997 Terms also set out the standard physical terms used for trading gas on the UK NTS under other documentation. For example, the ISDA NBP Annex and EFET NBP Appendix are both based on the NBP 1997 Terms and enable the trading of gas on the UK NTS under, respectively, the ISDA Master Agreement and the EFET General Agreement for Natural Gas. Both the ISDA and EFET documents seek to minimise basis risk as against the NBP 1997 Terms.
Until recent weeks, the NBP 1997 Terms and the Beach 2000 Terms have each been unchanged since their original publication. From 1 October 2015, the UK’s downstream gas Day is being brought into line with that prevalent in continental Europe and both sets of terms required amendment to reflect this change. As a result, updated versions of both the NBP 1997 Terms and the Beach 2000 Terms have now been published. Various companies active in the UK gas market have been involved in drafting and agreeing the new Short Term Flat NBP Trading Terms and Conditions 2015 (the “NBP 2015 Terms”) and Standard Terms and Conditions for the Sale and Purchase of Natural Gas for UK Short Term Deliveries at the Beach Sub-Terminals using a 0500 hours to 0500 hours Gas Day 2015 (5:5) (the “Beach 2015 Terms”).
While certain amendments that have been made to the new NBP 2015 Terms and Beach 2015 Terms stem from the changes to the United Kingdom downstream gas Day, the opportunity has been taken to update each set of terms in other ways, although the NBP 2015 and Beach 2015 (like their predecessors) each essentially remain structured as a set of standard terms applying to individual transactions rather than as a single master agreement governing all transactions of a particular type. This Client Alert highlights the key changes.
NBP 2015 Terms As a result of the changes to the United Kingdom downstream gas Day, under the NBP 2015 Terms, the definition of gas “Day” has been amended such that it has the meaning specified in the Uniform Network Code, being “the period beginning at 0500 hours on a day and ending at 0500 hours on the following day” (effective 1 October 2015). This replaces references to 0600 hours in the previous sets of terms. In addition, an "Accurate Trade Nomination" under the new NBP 2015 Terms is required to be made by a party before the time which is two hours prior to the end of the gas Day (which as at 1 October 2015 will be 0300 hours).
Another key difference in the NBP 2015 Terms is the approach to termination and the calculation of the termination amount. Under the original NBP 1997 Terms, the non-defaulting party could terminate an individual transaction following the other party becoming subject to one of the default events specified in the NBP 1997 Terms. Following the termination, the non-defaulting party was required to calculate a termination payment based on a calculation of the market value versus contract value of the transaction. Under the revised clause 10.1 of the NBP 2015 Terms, the non-defaulting party may terminate all (but not some only) outstanding transactions, where there is an insolvency event, a misrepresentation or a material adverse change in the financial standing of the other party. Under the revised clause 10.2, there remains the ability to terminate affected transactions only where there is a failure to pay, a material breach or a failure to provide or maintain security (where such events have not been remedied). The new clause 10.4 introduces a “Termination Amount” concept, being an amount equal to the non-defaulting party’s “Loss” in respect of the terminated transaction plus any reasonable and documented out of pocket expenses, third party costs and fees incurred in terminating such transaction. Following the termination of all transactions pursuant to clause 10, the “Termination Amount” in respect of each transaction (together with all other amounts due and payable at the termination date between the parties in respect of such transactions), shall be netted to produce a single net amount which is to be paid by the party owing such net amount to the other party.
Other notable changes to the NBP 2015 Terms include:
- Revised definition of “Force Majeure” additionally to include an event or circumstance beyond the reasonable control of a Party which causes National Grid to suspend or terminate processing of NBP Trades
- New definition of “LIBOR”, being “the daily Sterling one month mean interbank lending rate (expressed as a percentage per annum) as compiled by the Bank of England and quoted on its website on the due date”
- Reference in the terms to the ability for parties to enter into confirmations by means of an electronic matching process
- Deletion of the old (and seldom used) option “B” in clauses 4.2 and 4.3 in respect of the calculation of the amount payable for a breach of trade nomination obligations in clause 4.1 by Seller or Buyer
- Under the revised clause 6.4, if the due date for payment is not a “Payment Banking Day” then payment shall be made on the immediately following Payment Banking Day (rather than the previous Banking Day as in the NBP 1997 Terms)
- Introduction of the reference to VAT reverse charge in clause 5.4
- Interest on unpaid amounts payable at a rate of LIBOR plus 3%; and
- Deletion of ability of a party to assign to an affiliate without written consent from the other party.
Beach 2000 Terms As per the NBP 2015 terms, the definition of gas “Day” in the Beach 2015 Terms has been amended to being the period beginning at 0500 hours on a day and ending at 0500 hours on the following day. The definitions of “month” and “week” have also been amended accordingly. However, due to concerns over expense and maintenance, not all of the UK Beach sub-terminals will be changing the gas “Day” to 0500 hours to 0500 hours, and many will remain as being 0600 to 0600 hours. As such, the revised Beach 2015 Terms will only apply to the Beach Sub-Terminals using a 0500 hours to 0500 hours gas “Day”.
In the same manner as the NBP 2015 Terms, the termination and calculation of termination amount language in the new Beach 2015 Terms has been amended. Under clause 15 of the Beach 2015 Terms, clause 15.1 introduces the requirement to terminate all (but not some only) of the transactions where an event under clause 15.1.1 to 15.1.6 occurs. Clause 15.3 introduces the “Termination Amount” language being an amount equal to the non-defaulting party’s “Loss” in respect of the terminated transaction plus any reasonable and documented out of pocket expenses, third party costs and fees incurred in terminating such transaction, as per the NBP 2015 terms.
Other notable changes to the Beach 2015 Terms include:
- New definition of “LIBOR”, as per the NBP 2015 Terms (as above)
- Amendment to clause 7.2.1 (in respect of Shortfall Gas), meaning that, in respect of Shortfall Gas arising, the amount calculated under clause 7.2.1 (payable by Seller to Buyer (where positive)) shall be the sum of (SMBP-CP) x SG, where “SMBP” is the System Marginal Buy Price for the Day in question, “CP” is the Contract Price and “SG” is the quantity of Shortfall Gas arising for the Day in question
- Notice to be given in clause 7.2.2 shall be no later than 1600 hours (rather than 1700 hours in the Beach 2000 Terms)
- Under the revised clause 8.5, if the due date for payment is not a “Payment Banking Day” then payment shall be made on the immediately following Payment Banking Day
- Introduction of the reference to VAT reverse charge in clause 8.12
- Introduction of ability to transmit invoices by email
- Deletion of ability of a party to assign to an affiliate without written consent from the other party; and
- Deletion of rounding to two decimal places in old clause 14.
Along with the new NBP 2015 Terms and the Beach 2015 Terms, there have been published suggested letter agreements for implementing the new terms (the “Change Letters”). The Change Letters are drafted to take effect from 0500 hours (London time) on 1 October 2015 and under the terms of the draft Change Letters, all transactions after the later of 1 October 2015 or the date the Change Letter is entered into, shall be governed by and subject to the relevant 2015 terms. In respect of existing transactions, any transaction entered into on the old terms for a supply period commencing on or after 0500 hours (London time) on 1 October 2015 shall instead be governed by and subject to the 2015 terms. In respect of the Beach Change Letter, a list of the “5:5 Delivery Points” will need to be annexed to the Change Letter. It is acknowledged in the draft Change Letters that the gas “Day” that starts at 0600 hours on 30 September 2015 and ends at 0500 hours on 1 October 2015 consists of only 23 hours but there will be no change to the “Daily Quantity” for any transaction for that gas “Day” (which shall each be delivered in 23 hours).
We understand that both EFET and ISDA legal committees will be working towards drafting documentation relating to the new NBP 2015 Terms and the Beach 2015 Terms and the impact upon any relevant appendices or annexes.
What to do next? For those trading under the NBP 2015 Terms and the Beach 2015 Terms on a stand-alone basis, the Change Letters can be executed in order to bring the terms governing underlying transactions up-to-date. In respect of trades executed under an ISDA or EFET master agreement, and in respect of future trading under these documents, as indicated above, market participants are likely to wait for the proposed responses from the respective organisations in order to see what will be the next steps and required action. It is also worth noting that for those trading under ‘NBP Amending Agreements’ or similar (i.e. bespoke agreements which use the NBP 1997 Terms but amend certain clauses), such documents should be reviewed in order to assess how to incorporate the updated NBP 2015 Terms and whether the amendments made remain appropriate.
We will provide a further update when the associated ISDA and EFET documentation is published.
Read more about The 2015 NBP Terms and the 2015 Beach Terms (and the Change Letters).
Client Alert 2015-232