Given the 15 to 20 year contract term of most long term LNG sale and purchase agreements (LNG SPAs), and in recent years, oil and LNG price volatility, many LNG SPAs contain price review mechanics to reset or renegotiate the contract price upon the occurrence of a particular event, or a defined circumstance.
In order to optimise their effectiveness (and minimise the scope for disputes), price review mechanism in LNG SPAs should clearly set out:
timing: does the price review take place (i) automatically at specified times or frequencies (ii) on the occurrence of a particular change in circumstances (either subjectively or objectively tested) or (iii) at specified times or frequencies provided there has been a change in circumstances;
circumstances: the parties should carefully consider subjective triggers involving “substantial”, “significant” or “material” changes in “economic circumstances”, “market circumstances” or the “energy market” of the buyer or seller which can easily lead to dispute as to whether the trigger has been reached. Objective tests need to be considered in the context of time and allow for short term fluctuations without constantly triggering a review.