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Call Me NAESB - Clash Over Force Majeure in the Natural Gas Industry's Master Sale and Purchase Agreement

The NAESB Contract is a familiar element in the day-to-day dealings between natural gas buyers and sellers in the U.S. — a standard form that serves as a useful draft for short- and long-term gas supply agreements — just fill in its blanks and use it, or adjust it until you have a deal. Winter Storm Uri, the devastating deep-freeze event that brought much of Texas to an icy standstill and a deadly blackout in February 2021, raised all kinds of questions about how to interpret the contract’s boilerplate force majeure provisions. As part of the aftermath, some electric industry participants (primarily in other states, not Texas) are pushing at NAESB for changes to the force majeure provisions with the aim of clarifying things and maybe reducing their use to forgive a failure for gas to show up. But nothing is uncomplicated in the world of contracts and force majeure, as we discuss in today’s RBN blog.

In January of last year, we posted a blog about how much of the voluminous civil litigation involving supply failures during Winter Storm Uri centered around the force majeure section of the Base Contract for the Sale and Purchase of Natural Gas — a.k.a. “the NAESB Contract” — produced by the North American Energy Standards Board (NAESB). We imparted the very important wisdom that it’s pronounced “Naysbee,” not “Nazbee,” and that the process of changing any of the organization’s standards could be pretty complicated and time-consuming. 

For those of you who have participated in NAESB, you know what we mean, and you know that we’re understating the complexity and time involved. However, participation in NAESB is very worthwhile for many in the energy industry, since this is where the standard business practices for the gas and electric industry are formulated, then turned into law by the Federal Energy Regulatory Commission (FERC). The NAESB Contract is different, in that it is not a proposed rule for a regulatory agency. Instead, it is a very convenient standard form that can be used for short- or long-term buying and selling of natural gas — convenient in that it already addresses all the nits and trade-offs that used to take lawyers weeks to work out between counterparties (especially regarding long-term agreements). Using the NAESB Contract typically shortens the time needed to commit to a purchase and sale from a week or more to just a few hours, especially in short-term deals. And by the way, no one has to use the standard contract — it’s just a tremendous, time-saving tool available to the market (but you have to buy it to use it), and over time it’s become pretty much universally accepted.

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