MAINTAINING PRICE REVIEW CLAUSES IN EUROPEAN LONG-TERM GAS AND LNG SUPPLY CONTRACTS
European gas and liquefied natural gas (LNG) supply contracts were historically of long-term duration (15 years or more). The purpose of this has been to provide buyers security of supply, and sellers steady cashflows to cover their investment. There was no traded gas price, and so contract prices were usually based on, and indexed to, the price of competing fuels, such as oil products. Notwithstanding this kind of indexation, over the duration of the contract, the relationship between the value of the gas or LNG and competing fuels might evolve differently than what was reflected in the contract price. To address this, the contracts included price review clauses allowing for a revision of the price formula – typically, the entire formula, rather than just altering, for example, the relative weights of the components of the formula.
Since 1996, gas trading hubs (virtual or physical) have been gradually established in Europe. As the volume of gas and trades increased and new contractual products (such as contracts for forward delivery) became available, hub prices were increasingly said to reflect the market value of gas. Within a few years, by the mid-2010s, many European pipeline contracts moved away from oil-based pricing and included (partially or fully) hub-indexation, though many LNG contracts remained indexed to oil.
The growth of hub-indexation in Europe has led to debate over whether price review clauses are still relevant. Some argue hub prices track the market value of gas over time and so, by definition, hub-indexed contract formulae would not require correction. Subject to sufficient liquidity and other market-integrity criteria, buyers could always sell their hub-indexed gas on the hub, the argument goes. Recent trends for shorter-duration contracts and greater volume delivery and flexibility may arguably have also reduced the necessity of price revision. There are, however, various considerations militating toward retaining price review clauses.
Apr-Jun 2025 issue
Three Crowns LLP