Beyond Price Reviews: Adjudicating Claims of Financial Hardship - Chapter 13 - Leading Practitioners’ Guide to International Oil & Gas Arbitration

Author(s):

George M. von Mehren

Ben Holland

Page Count:

26 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

Natural gas and liquefied natural gas (LNG) are often sold under

long-term, take-or-pay contracts. There are good business reasons for

this. For sellers, the revenues represented by take-or-pay

commitments may be essential to obtaining financing for, or

justifying the investment in, the high capital costs of producing and

transporting natural gas or LNG.1 For buyers and their customers, a

long-term supply contract ensures security of supply and secures their

own infrastructure investments. At the same time, these agreements

can represent considerable risk for both sellers and buyers because

the economic conditions under which they transact their businesses

may change during the lengthy term of the contract. As a practical

matter, what will happen over the life of an agreement is either

difficult or impossible to predict.2 Changed circumstances causing

financial hardship beget disputes and arbitration.

This has been evident during the past ten years in Continental

European gas and LNG markets. A host of changes—notably

liberalization, the economic crisis, the development of gas trading hubs

and other factors—have decreased and often eliminated the margins

available to buyers of gas and LNG when they resell the gas purchased

under long-term supply contracts to customers in their local markets.

In response, European buyers have initiated numerous “price review”

renegotiations and arbitration proceedings seeking to reduce the prices

they pay suppliers under long-term gas supply contracts. To a lesser

extent, sellers of gas into Europe have also initiated price reviews on

occasion and have been successful in obtaining higher prices.

Discussed in detail elsewhere in this volume,3 gas and LNG price

review proceedings are based on express contractual provisions in gas

and LNG supply contracts that specifically permit both buyer and

seller, on a periodic basis, to seek an adjustment of the contract price.

Typically these provisions establish a procedure under which either

party (or both) may notify the other of their claim for a price

adjustment. Generally, the buyer and seller are then contractually

required to negotiate the price dispute for a defined period of time. If

an agreement is not reached, either or both parties may initiate

arbitration. During the past ten years or so, arbitral awards in

European gas and LNG price review cases have often resulted in

significant monetary awards. Because the values in dispute are so

large, the outcome of these price review disputes are periodically

made public, through shareholder and other market announcements.

Price review arbitrations do not review non-price terms. Although no

analysis of the gas and LNG industry in Europe would be complete if

it did not consider their recent dramatic effect, gas and LNG price

reviews have limitations. First, these price reviews are based on an

express contractual agreement. They are not, per se, available when the

relevant supply contract does not include a price review provision.

Second, when price review provisions are included, they generally
only permit a renegotiation and review of the price payable under the