UK: Pricing Arbitrations: It’s A Gas, Gas, Gas

As has been widely reported in the industry, there has been a spate of gas price arbitrations in which buyers have largely succeeded in having contract prices revised in their favour, sometimes by hundreds of millions of dollars.1

This article looks at the theory underlying price variation clauses, and how to approach a question about the meaning of an individual clause. The approach that a tribunal may take to such clauses may be informed by going back to basics, looking at the very reasons for having such a clause, before considering some of the mechanisms that the parties might employ. Practically, though, it should be borne in mind that what ultimately matters is the specific wording of the clause (or draft clause) in front of you, rather than what was decided about a different clause in another award.

Why have a price which changes?

A typical gas sales agreement ("GSA") provides for the sale and purchase of a minimum quantity of gas each year for 15-20 years, or the producing life of the field, with a provision for the price to change in certain circumstances. In theory, however, a producer could agree to supply, and a buyer to buy, a given quantity of gas every year for the next twenty years for a fixed price.

One obvious reason why parties might instead want to provide for the price to change is to account for inflation. The cost of labour and materials to operate, maintain and eventually decommission the field can be expected to increase in line with background inflation. The profits of a supplier that is paid the same price throughout, will tend to fall inversely to this inflation.

This is addressed by providing for price to be adjusted periodically according to a published measure of inflation. Overall, the effect should be neutral. The buyer pays more for gas, but will also be charging its customers more. Disputes will only arise if the relevant index ceases to be published, or the way it is calculated changes.

Assume, then, a contract which still provides for a fixed price at the outset, but also makes some provision for it to increase in line with inflation. It can be seen that, if, in the next 20 years, the realisable value of the gas to the buyer rises relative to the contract price, the buyer will reap all the rewards. If the realisable value of the gas to the buyer falls relative to the price, the buyer will suffer all the loss.

What would the initial price be? The producer must charge enough to cover:

  1. the cost of capital assets used to produce gas (wells, production hardware, pipelines);
  2. interest on loans it used to buy those assets; and
  3. the likely cost of operating, maintaining and decommissioning those assets (with a contingency for geological, operational and regulatory risk).

That is the minimum price any (sensible) producer will agree to. The result is a low risk for the producer. It will earn a guaranteed, inflation-adjusted minimum return for the next twenty years, insulated against any loss. Since the producer's risk is low, it can expect a commensurately low return. The initial price will be set at such a level as to provide the supplier only a small profit.

A producer might have more appetite for risk, and wish to share in the benefit of any increase in the realisable value of gas. The only way to reallocate the risks and rewards is to provide for the price which the buyer must pay the producer to change as realisable value changes. That value depends on what the gas is for.

What is the gas for?

When looking at a price variation clause and trying to work out what the parties' bargain was it is also relevant to ask what the buyer wanted:

  1. A domestic gas supplier buys gas to sell to the domestic end consumer to use for heating and cooking. Such a company usually has long term commitments in terms of infrastructure and maintenance. Its customers' demand for gas is relatively price inelastic – they cannot easily shift to using electricity if the relative price of gas increases. Domestic gas supply may also be regulated, to prevent the supplier passing the whole of any increase in the cost on to the consumer. If the cost of gas falls, it may be forced to pass part of its saving on to the consumer.
  2. A domestic power supplier uses gas to generate electricity which it then supplies to the domestic end consumer. It must compete with those who generate electricity using other fuels. Its customers' demand is more price elastic. If the price of gas increases relative to those fuels, it can only pass on so much of this increase before the customer shifts to another supplier which uses a cheaper fuel.
  3. Wholesale power suppliers and wholesale gas suppliers supply gas and electricity to domestic power and gas suppliers. They may buy the gas with a view to satisfying their obligations under long term contracts or they may buy it speculatively, in the hope of being able to sell it at a profit on a much shorter term spot market or futures market.


To provide for re-allocation of changes in the realisable value of gas, a GSA usually includes some form of indexation. A basic indexation formula would be:

Contract price = initial fixed price x (realisable value of gas in review period / realisable value of gas in base period)

If the initial fixed price was 40p and the value was 50p, then realisable value is split 80/20 between producer and the buyer. If realisable value increases 10p to 60p, the price becomes 48p = 40*(60/50). It can be seen that the extra 10p of realisable value is being split between the parties in the original 80/20 ratio: 8p to the producer and 2p to the buyer.

Sometimes the contract will only allow the price to move between a minimum "floor" and a maximum "ceiling" price, or only to move by a maximum amount each review period. Alternatively, the formula might provide for the price to increase at a lower rate above a certain point, and to decrease at a lower rate below a certain point ("S-curve" formula).

The reason for departing from the linear relationship at high and low prices is that: (i) there will be a price above which the buyer will be unable to make a profit; and (ii) there will be a price below which the producer will be unable to make a profit. Changing the formula which applies at the upper and lower bounds prevents or limits the potential loss.

Occasionally there will be disputes about the application of the formula, but these are uncommon – it is just a mathematical exercise. Historically the principal problem with indexation formulae has instead been in finding a reliable objective measure (or proxy measure) for the gas's 'realisable value'. The value an individual buyer can realise depends, in part, on its cost of sales which in turn depends on how it manages and structures its business. Producers will not want to make their remuneration depend upon how efficiently or otherwise the buyer manages its business. Working out the real realisable value would also involve a prohibitively frequent, costly and complex accounting exercise, which would itself give rise to disputes.

The solution is to use the 'market price' of gas to represent realisable value. In the past, however, there was little gas to gas competition, and so no 'market price'. Gas was less a global commodity, but was most often extracted to be sold into the local market, for a price negotiated with the local buyer. The buyer would often be a national or regional monopoly. As a result, many older contracts used changes in the price of an alternative fuel – such as oil or coal - or changes in wholesale electricity prices, or some kind of blended figure, as a proxy for changes in the value of gas.

Gas has since become more of a global commodity, with a price which is less tied to oil. There has been a downward pressure on gas prices due, (for example) to:

  1. increased demand for gas as environmental regulation has made it relatively less expensive compared to more polluting coal;
  2. regulation discouraged flaring, meaning more gas is recovered and brought to market;
  3. more pipeline capacity constructed, allowing gas to be used economically further from the well head;
  4. more use of LNG technology allowing bulk shipping of gas when there is no pipeline;
  5. break-up of national monopoly suppliers;
  6. less effective cartel behaviour by gas producers than by oil producers;
  7. increased the supply of gas due to use of hydraulic fracturing in shale, which has not increased to oil supply to the same degree.

Purchasers under older contracts have therefore been forced to pay a price which has escalated with the oil price, when the real market price of gas has fallen. This inflated cost obviously makes the purchaser less competitive and profitable, and vulnerable to competition from rivals who are able to take advantage of the low market price to undercut the purchaser. It appears to have been this disconnect between oil price and gas price which has prompted the recent spate of claims under price-reopener clauses.

Price re-opener clauses

A price re-opener clause typically:

  1. identifies 'trigger' criteria which cause or permit the review procedure to be invoked;
  2. sets out a procedure for negotiation, and provides for dispute resolution (typically arbitration or expert determination) if this is unsuccessful; and
  3. provides criteria for determining how the formula is to be changed.

Examples of trigger criteria are:

  1. A contract might give either party the right to initiate a price review periodically - say every 3 years or 5 years.
  2. A contract might give each party the right to initiate a limited number of price reviews at any time during the contract term (so-called "wild cards").
  3. Review might be triggered if some objective benchmark is met – such as if the reference price changes more than a certain % in a given period.
  4. Frequently the trigger will be less precisely defined, e.g. if there is:

    "any substantial change in the economic circumstances relating to this Agreement and either Party feels that such change is causing it to suffer economic hardship"2,


    "if at any time either party considers that economic circumstances in Spain beyond the control of the parties, while exercising due diligence, have substantially changed as compared to what it reasonably expected when entering into this Contract ... and the Contract Price ... does not reflect the value of Natural Gas in the Buyer's end user market".3

With triggers in this last category, it may not just be changes in the reference price which trigger a review. To give one example, a party's operating costs might increase (through taxation or regulation) such that the floor and ceiling prices, or S-curve formula no longer protects that party against loss as it did before, and a party relies on this as "substantial hardship" or a "material change in economic circumstances".

Depending on the detail of the clause there may therefore be a threshold question about whether trigger criteria have been met, and/or whether the right to a review has been properly exercised (for example, whether any notice requirements have been complied with).4

Assuming the trigger criteria have been met, the contract will set out wording prescribing how the parties want the formula to be changed. An example might be:

"The revision of the price shall consist in adapting it in a reasonable and fair manner to the economic circumstances then prevailing on the imported Natural Gas market and on the market for the other imported energy supplies competing with this production in the East Coast and Gulf Coast areas of the United States of America within the framework of long term contracts. The parties shall take into account the individual characteristics of each of the above products including the quality, the continuity of deliveries, the production and transportation costs, etc ..."5

Sometimes the clause will expressly require the pricing formula to be changed so as to restore the original relationship between the contract price and the market price, or – if the index is no longer appropriate – for an appropriate index to be substituted. An alternative wording is to require that the gas be re-priced so as to allow it to be marketed "economically" in the end market.

Gas price arbitrations

Often the contract will provide for a form of structured negotiation. If the parties are unable to agree on what change the contract wording requires, the contract will usually provide for arbitration (less often expert determination and rarely litigation).

There is sometimes an issue as to the scope of the decision maker's authority - in particular as to which variables the tribunal can change, and from what date. Similarly, some clauses impose upper and lower limits on what changes the tribunal can make. This can be by reference to the position which the parties took in any negotiation. For example, in a 'pendulum' or 'baseball' arbitration, the tribunal is restricted to a choice between the parties' proposed prices. There may also be an issue as to whether a tribunal can take into account events which postdate the trigger notice, or whether it is restricted to a 'snapshot' as of the date the review was initiated.

Occasionally, an arbitration clause will provide for the tribunal to decide the issue ex aequo et bono or will provide for a governing law which excuses non-performance or allows bargains to be (in effect) re-written on grounds of supervening hardship.6 More commonly, though, a tribunal will simply be concerned to interpret and apply the contract – specifically that part wherein the parties agreed when, and how, their price or formula by which it is to be determined should be revised. As noted above, various wordings are used, varying from an express requirement that the pricing formula be changed so as to restore the original relationship to a bare provision with provision for the formula to be revised if it is no longer 'fair' or 'equitable' or 'reasonable'.

From the perspective of an English lawyer, many price re-opener clauses really seem to be aimed at essentially the same thing – giving effect to the substance of the bargain which the parties originally struck. The best guide to what the parties mean by "fair", "equitable" etc. is what they were freely agreed to. The starting point, then, is a detailed analysis of the original bargain, and of the parties' respective positions:

  1. What were the parties seeking to achieve when they agreed a price adjustment formula, rather than a contract which just fixed the price for the term?
  2. Was the input, or function, which is in contention just a means to achieving that end, or was it an integral part of the bargain?
  3. If so, would the parties' original end now be better achieved by changing that input, or formula?

It may be much harder to answer these questions convincingly than to ask them. By way of an illustration, though, consider an older contract which provided for indexation by reference to the price of oil. It might be argued that the parties did not really intend to tie the price to oil – rather oil was a proxy for the market price of gas, at a time when there was no market price for gas. The oil price was just the best available means to that end, and now there is a new measure which better represents what the parties wanted.

But suppose the exact same contract had been entered ten years later, when a comparator gas price was readily available. Now the linking of the price to oil begins to look like a deliberate choice by the parties – an integral part of their bargain, or an end in itself - rather than a means to some other end. The contract looks more like a deliberate 20 year speculation on the relationship between oil and gas prices.

There is some parallel here with the (historical)7 test for an implied term. If an officious bystander had said to the parties "what if the connection between the oil price and the gas price were severed, and there was a market price for gas readily available – would you use that price instead?", would the parties have said "of course, we'd use that price instead".

It seems traditional to conclude any article about price reopener clauses, and the recent spate of awards, with a rhetorical question about whether these are a cause for concern and whether arbitrators should be allowed to 're-write the parties' bargain. The truth, though, is that any price re-opener clause is, itself, part of the parties' bargain. There is no reason to think that a tribunal is any less able to determine, and give effect to, the parties' intention as expressed in a price re-opener clause than in any other clause. Moreover, no one has imposed these clauses. They are of the parties' own making, and the parties are free to set the limits of the tribunal's authority at the outset.


1. Reuters Edison's 450mln euro discount on Qatari LNG holds hope for Europe 11 September 2012, Reuters Edison wins Libya gas arbitration with Eni 1 October 2012, Italian Edison wins Algerian long-term natural gas contract case 1 May 2013, Businessweek Gazprom faces arbitration with Edison after ruling on RWE price 30 July 2013, Reuters ENI demands $10 billion from Statoil in arbitration 8 November 2013, New York Times ENI reaches deal with Statoil for gas price cuts 27 February 2014.

2. This is the price re-opener clause from Superior Overseas Development Corporation and Philips Petroleum (UK) Co Ltd v British Gas Corporation [1982] 1 Lloyd's Rep. 262.

3. This is from the price re-opener clause in Gas Natural Aprovisionamientos, SDG, S.A. v. Atlantic LNG Company of Trinidad and Tobago in the United States District Court for the Southern District of New York (2008) WL 4344525 (S.D.N.Y.).

4. For an example of a dispute about the validity of a notice given under a price review clause see Esso Exploration & Production UK Limited v Electricity Supply Board [2004] EWHC 723 (Comm).

5. From a 1975 contract between Sonatrach and Distrigas which is published in the online SEC Info database.

6. For an English seated arbitration, there can be no appeal on law from an award which is made ex aequo et bono, or which is made subject to a foreign substantive law. Otherwise, the interpretation of a clause which provides for when the price is to change is simply a question of law. As such, unless the parties agree otherwise, there will be the possibility of an appeal under section 69 of the Arbitration Act 1996.

7. See Attorney General of Belize & Ors v Belize Telecom & Ors [2009] UKPC 11.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.