While long-term gas and liquefied natural gas (LNG) contracts are customarily structured around risk allocation dynamics, substantive and/or temporal constraints in the contractual terms can often limit a party’s ability to introduce meaningful change or secure relief in varying market environments.
The ongoing and escalating gas market events in 2022 have shined a spotlight on this point, raising questions about the efficacy of traditional long-term gas and LNG sale and purchase agreements (SPAs) in dealing with such extreme price and demand volatility. The impact of significant spot market price fluctuations has also prompted an evolving course of conduct by seller counterparties in the operation of these contracts, provoking increasing incidents of contractual arbitrage, missed cargo shipments, and partial loadings. This has naturally impacted the reliability and certainty of supply for buyers in a market where alternative supply is tight and short-term spot purchases are often considerably more expensive than the price paid under long-term contracts.
