Destination provisions in liquefied natural gas sale and purchase agreements are among the most negotiated and least administered terms in energy contracting. They are negotiated hard because they determine who captures the value when market conditions shift between the signing of a long-term agreement and the loading of a particular cargo. They are poorly administered because the duties they create are infrequent, and infrequent duties live in people rather than systems.
The commercial logic is straightforward. A seller selling into a specific market wants to prevent its own cargoes reappearing as competition in a higher-priced market. A buyer that has paid for a cargo and taken title wants the freedom to send it wherever the economics are best. The resulting clause is a compromise, typically allowing diversion subject to conditions and sharing the upside.
Where this gets interesting is that the compromise generates real operational work, and the work arrives suddenly. A cargo becomes divertible when someone spots an arbitrage, and from that moment a notice period is running, information has to be assembled and a calculation has to be agreed. This article is about the terms that drive that work and how to hold them somewhere usable.
Five terms that decide how a diversion runs
A destination clause is rarely a single sentence. It is a small cluster of provisions, and the interaction between them determines whether a diversion is a routine commercial decision or a negotiation under time pressure.
- The restriction itself, whether destinations are fixed, flexible within a region, or free, and whether the limit attaches to the cargo or to the annual programme.
- Consent or notice, whether the seller must approve, with what response time, or whether notice within a stated period is sufficient on its own.
- The profit-share formula, the price comparison basis, the ratio, and critically the exhaustive list of costs the buyer may deduct before the split.
- Notice content and timing, what the notice must contain and how far ahead it must be served, since an incomplete notice frequently restarts the clock.
- Post-diversion settlement, the deadline for a final statement with supporting evidence and the period for payment or credit of the shared gain.
Read together, these five determine the answer to the only question a trading desk asks in the moment: can this cargo move, by when must we tell them, and what does the economics look like after the split. If the answer takes a day to assemble from the agreement, the arbitrage has usually closed.
A profit-share formula that deducts reasonable additional costs invites a dispute every time it operates. An exhaustive list, naming incremental voyage cost, boil-off, port and canal charges, demurrage, additional insurance and any agreed administrative allowance, converts an argument into an arithmetic exercise. Agreeing the list at drafting costs an hour; disagreeing about it after discharge costs considerably more.
Holding the terms where they can be used
Destination and diversion provisions are a good test of whether contract administration is working, because they are low-frequency, high-value and time-bound. Five practices make the difference.
- Extract the destination terms as fields. Restriction type, consent or notice, notice period, profit-share ratio and settlement deadline held as searchable fields across the LNG portfolio rather than read from the document each time
- Pre-build the notice template. The clause specifies the content; the template should mirror it exactly, so a notice served under pressure is complete and the period starts running on the first attempt
- Instantiate the obligations on diversion. A diversion event creates a defined set of duties with dates: notice served, seller response, discharge confirmation, final statement, settlement. Instantiate them from a template rather than tracking by email
- Collect settlement evidence as it arises. Port invoices, bunker and demurrage statements and price references are easiest to capture in the week they are issued. Attaching them to the open obligation avoids a reconstruction later
- Review the clause population annually. Destination terms change as portfolios and market structures change. An annual read across the portfolio shows where restrictions have become commercially or legally awkward before a counterparty raises it
A five-step roadmap for administering destination terms
Step 1, inventory the destination terms across the portfolio
Build a single view of every LNG agreement with its restriction type, consent or notice basis, notice period, share ratio and settlement deadline. Most portfolios turn out to contain three or four distinct patterns rather than a different arrangement per contract, which simplifies everything downstream.
Step 2, confirm the delivery term interaction
Record whether each agreement is on a delivered or free on board basis, because the two put routing responsibility in different hands and carry different legal exposure on destination restrictions. This field is also the first thing counsel asks for when assessing a clause.
Step 3, standardise the cost definition at renewal
Where formulas rely on open-ended cost language, propose an exhaustive list at the next renewal or amendment. Sellers and buyers both benefit from removing the argument, which makes this an unusually easy negotiation to open.
Step 4, template the diversion workflow
Define the obligation set a diversion creates, with owners by role, dates derived from the event and required evidence per step. Tested once on a historical diversion, the template will handle the live ones without anyone reading the agreement under pressure.
Step 5, report diversions and settlement ageing
Track diversions per period, the gain shared, and how long settlement statements take against their contractual deadline. Ageing is the useful metric, because slow settlement is where counterparty relationships and recovery both quietly degrade.
Turn a diversion into a template, not a scramble
Aavenir instantiates notice, response, statement and settlement obligations from the destination clause, with owners, dates and evidence attached.
What good administration is worth here
The value is concentrated in two places. The first is speed: a desk that can answer the divertibility question in minutes rather than hours captures opportunities that would otherwise close, and that difference is measured in the price spread on a full cargo. The second is settlement discipline: shared gains that are calculated late, from reconstructed cost data, are routinely settled at less than they should be, simply because the evidence has decayed. Neither of those requires sophisticated tooling. They require the terms to be structured and the duties to be instantiated, which is the same discipline applied to take-or-pay and minimum volume commitments.
Diversion duties and their evidence
The table sets out the obligation sequence a diversion creates, with a workable owner and the artefact each step should produce. Dates are expressed relative to the event because that is how they operate in practice.
| Duty | Trigger | Owner role | Evidence |
|---|---|---|---|
| Diversion notice served | Decision to reroute | Trading desk | Notice as served with timestamp |
| Seller consent or acknowledgement | Notice receipt | Counterparty manager | Written response within clause period |
| Cost data collection | Voyage in progress | Shipping operations | Port, bunker and demurrage invoices |
| Final profit-share statement | Discharge completion | Contract administration | Statement with calculation inputs |
| Settlement of shared gain | Statement acceptance | Finance operations | Payment or credit reference |
Destination clauses reward preparation in a way that is unusual among contract terms, because the window in which they matter is short and the information they require is specific. A portfolio where restriction type, notice period, share ratio and settlement deadline exist as fields, and where a diversion instantiates a known set of duties, handles these events as routine. A portfolio where all of that lives in the agreements handles them as emergencies, and settles them late. Operators already running structured obligation management for energy and mining can add the diversion template to the register they have.
For related guidance, see Contractor prequalification and MSA control for operators, Decommissioning and abandonment obligation tracking and CO2 offtake agreements and who owns the risk.
