Price Re-Openers In Long-Term Gas Supply Agreements - Chapter 12 - Leading Practitioners’ Guide to International Oil & Gas Arbitration

Author(s):

Michael Polkinghorne

Sven-Michael Volkmer

Page Count:

34 pages

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Published:

August, 2015

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Originally from The Leading Practitioners' Guide to International Oil & Gas Arbitration

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I. INTRODUCTION

In this chapter, we examine price review clauses in long-term gas

sales agreements (GSAs). At their most general level, price review

clauses allow the periodic review and adjustment of price provisions

in GSAs. While variations of such clauses exist around the world, the

focus in recent years has been on Europe. The mature and

competitive US gas market has seen the role of price review clauses

diminish; and the limited competition in Asian gas markets has

fostered stability, giving the bulk of market players little reason to

commence formal price reviews (let alone submit those reviews to

arbitration). Upheavals in European gas markets, by contrast, have

produced a spate of gas price negotiations and arbitrations in recent

years. This chapter draws from this body of price reviews and

focuses on price review clauses as they appear in European GSAs.

The first European GSAs date back to the development of gas

import pipelines in Germany, Belgium, and France in the 1960s.1

Their successor agreements usually share the same basic features,

notably a term of 15-20 years which is often extended. When

concluding GSAs for such long periods, the parties were (and remain)

mindful that economic circumstances may change significantly and

unexpectedly over the agreement’s lifetime. One way of dealing with

these “known unknowns”2 is to determine the GSAs’ price through a

formula rather than setting a fixed price. In addition, GSAs usually

provide for regular reviews of the price formula through the price review

clause (also referred to as price re-opener or price revision clause).

Many price review clauses use deliberately general and broad

terms that require legal and commercial interpretation.3 The

interpretation of these clauses is a topic of interest because many

European gas buyers and sellers continue to be engaged in gas price

negotiations and arbitrations. To name but a few recent examples:

• In January 2014, Germany’s RWE stated that it is “in the

middle of price negotiations with” Gazprom with the aim of a

“structural solution, which is market-based.”4 Only six

months earlier, in June 2013, an ICC tribunal had handed

down an award reducing the price in a GSA between

Gazprom and RWE, requiring Gazprom to reimburse RWE

some € 300 million for overpayments on gas purchases;5

• In March 2014, Italy’s Eni signed a final agreement with

Statoil of Norway to reduce the prices of their long-term
GSAs, cutting Eni’s costs by an estimated € 500 million;6