Industrial Gas Commercial Advisors (IGCA) offers consulting services for the purchase of new requirements of industrial gases, or with assistance with an existing product supply agreement which isn’t performing as expected (see the “Expert Witness” section).
We specialize in on-site and merchant agreements, and offer expertise in products such as oxygen, nitrogen, argon, hydrogen, carbon monoxide, syngas, CO2 and CDA. Our founder, John Peterson, has over thirty-five years of experience in drafting and administrating product supply agreements covering buying, selling and product swap arrangements.
With respect to new requirements, use IGCA for assistance in defining the initial requirement and its mode of delivery, selection of the specific industrial gas supplier, and negotiation of the PSA, as discussed below.
When determining the most reliable and cost-effective method in which to purchase industrial gases, it is important to understand that several modes of delivery should be considered. Industrial gases are typically categorized in this fashion, that is, by mode of delivery. For large atmospheric gas requirements, the three major categories are pipeline or on-site, merchant (or bulk) and standard plants (such as a membrane, molecular sieve or small cryogenic air separation facility).
As an example, assume an oxygen supply is required for the production of a common petrochemical, such as ethylene oxide. To determine the best mode of industrial gas supply, the potential customer should consider numerous variables such as:
1. Quantify of the oxygen needed, in terms of the monthly need and the instantaneous flowrate
2. Minimum purity requirements of the oxygen supply, and the ramifications of purity fluctuations
3. Reliability requirements of the supply, and the consequences of a temporary loss of oxygen flow
4. Pressure requirements for the oxygen supply, and what pressure fluctuations are acceptable
5. Value of byproducts (such as nitrogen) which may be available from the industrial gas supplier, depending upon the mode of supply selected, and
6. Site infrastructure requirements, such as plot size and utility availability, for the on-site mode of delivery evaluation
Each one of the above factors involves a set of tradeoffs which impact the cost and reliability of the oxygen supply, and ultimately determine the best mode of delivery to seek from the industrial gas supplier. And, each variable needs to be addressed contractually.
After determining the preferred mode of supply, let IGCA assist in developing the RFP (request for proposal) to solicit input from the appropriate suppliers. IGCA’s industrial gas consulting services may be utilized to develop and evaluate proposals, economically evaluate various proposal options, and to work with the industrial gas supplier to find integration opportunities between the supplier and customer facilities.
When the mode of supply and potential supplier are identified, use IGCA as your industrial gas consultant to assure the product supply agreement works in both the short and long terms.
Since the agreements, particularly for large needs, are typically long term in nature (fifteen to twenty years), it is exceedingly important to make sure that product supply agreement remains balanced well into the agreement’s term. While several issues are important to address contractually, two of the major areas are pricing escalation and renewal provisions. A brief discussion of each follows.
In terms of pricing escalation, use IGCA as your industrial gas consultant to assure the escalation method is accurate and reasonable. Inaccurate escalation can lead to a very good deal for the customer in year one, a mediocre deal in year three and an absolutely lousy deal in year five. Although escalation issues can be fixed in later years of the contract through negotiation or dispute resolution, it’s much easier just to get it right at the time the agreement is negotiated.
While pricing escalation can be performed contractually in a number of ways, one common technique is through an escalation formula.
The intent of an escalation clause, or formula, is to allow the industrial gas supplier to pass through changes in their major variable costs from the time of agreement execution. An escalation formula can address as many or as few specific variable costs as negotiated by the parties. Frequently, three to four variable costs are covered, with a fixed portion (or non-escalated) piece of the price to remain constant. The coverage factors simply define how much of the new price is impacted by each variable cost.
Coverage factors and specific variable costs to be addressed are a strong function of the mode of supply and the specific industrial gas to be purchased. For atmospheric gases, the key variable cost is almost always power. For hydrogen, the key variable cost is usually natural gas. Use IGCA’s industrial gas consulting services to assure the coverages *and* the indices are representative of the industrial gas supplier’s actual costs. An over-coverage situation or an inaccurate index can result in a noncompetitive price, especially in the later years of a long-term product supply agreement.
The second key contractual consideration regards term extension and agreement renewal. Since the supply of industrial gases, particularly in the case of large volume requirements, is very capital intensive for the supplier, it is common for the supply agreements to self-renew as the customer’s requirements change over time. In many cases, this is absolutely reasonable and appropriate; but in some cases, it’s not. IGCA’s industrial gas consulting services are available to identify such clauses and to suggest more balanced approaches during the initial negotiation of the product supply agreement. Again, addressing these issues up front is far less complicated than attempting to address through dispute resolution midway through the agreement term.