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The Guide to Energy Arbitrations - Second Edition

The Evolution of Natural Gas Price Review Arbitrations

Price review arbitrations are, as a collection of cases, the highest-value commercial disputes in the world today. The amounts at stake begin in the hundreds of millions of dollars and often climb into the billions. Yet despite the staggering amounts that hang in the balance, price review arbitration has only recently emerged from relative obscurity to become the subject of disputation in the wider energy arbitration arena.

The authors of this chapter have been involved in price review arbitrations since their inception. Throughout that period, the field has evolved in exciting and unexpected ways. This chapter seeks to map that evolution by providing an overview of the past, the present and the future of price review arbitration.

As this chapter makes clear, the twists and turns in the evolution of price review arbitrations have generally not been driven by changes in contractual provisions, legal rights or the acts or omissions of the parties involved. Rather, it has been external events – such as the liberalisation of the national gas markets in continental Europe, the global economic crisis, and the maturation of certain European gas hubs – that have driven the evolutionary path.

Parties to long-term gas supply contracts have therefore been forced to react – availing themselves of the ‘price review’ provisions in the long-term contracts to recalibrate their price formulae to reflect changed market conditions. The margin for error, however, is razor thin. Changing just a few cents per unit of gas can shift hundreds of millions of dollars between the parties because of the very substantial volumes delivered during the life of a long-term gas contract.

Arbitrators deciding these disputes therefore have a weighty and difficult task. Price revision provisions imbue the arbitrators with exceedingly broad authority to modify the pricing formula with strangely little direction on how to do so. Yet despite this awesome power and frequent lack of direction, arbitrators have – by and large – done a laudable job of getting it right.

As discussed below, the story of natural gas price reviews has been, until now, largely a European one. While this chapter starts at the beginning of that story, it is by looking backward that we see the positive and important role that international arbitration has played in the development of gas pricing over the past decade-and-a-half. And it is by reflecting on the past that we are able to make predictions for the future.

The dramatis personæ

The parties to price review arbitrations tend to be repeat players. The sellers are typically the producers of natural gas and government-owned, or formerly government-owned, entities with strong state participation. There are only a handful of producers around the world who regularly sell to the continental European markets: Gazprom (Russia), Sonatrach (Algeria), Qatargas and RasGas (Qatar), Nigeria LNG (Nigeria), Statoil (Norway), and Atlantic LNG (Trinidad and Tobago).

The buyers, by contrast, are often formerly state-owned companies from countries that do not produce significant gas domestically, but which have the infrastructure in their countries to accept delivery of the gas, transport it through an existing transmission network and distribute it to wholesalers or end-user consumers in the downstream market. Before the liberalisation of the European gas markets, these companies were predominately state-owned monopolists, which purchased from the suppliers and had the pipeline infrastructure to deliver the gas to end users.

Examples of former state-owned monopolists include Eni in Italy, Enagas in Spain and Geoplin in Slovenia. When the European gas markets liberalised throughout the 2000s, competitors entered these markets and the list of buyers grew. Edison from Italy, for example, was not a market incumbent, but has become a major buyer in the newly liberalised market.

These, then, are the usual parties to gas price review arbitrations. Historically, they have signed with each other a very particular type of contract: a long-term, ‘take-or-pay’ contract for pipeline gas or liquefied natural gas (LNG). And it is in this type of contract that the price review clause is typically found.

The price review clause

The history of the price review clause can be traced back to the early days of the North Sea gas industry. The upstream suppliers – the sellers under long-term contracts – often needed financing for the investment necessary to bring the gas to commercial production. To ensure that the producers would be able to repay the money borrowed, the sources of financing required the producers to obtain a guaranteed long-term revenue stream from downstream buyers.

Producers did so by signing long-term, ‘take-or-pay’ contracts with buyers, which obligates the buyers to pay for a pre-determined volume of natural gas, whether or not the buyers actually take that volume. This ‘volume commitment’ – often worth tens of billions of dollars over the life of the contract – gives the sellers the guaranteed revenue stream, providing long-term cash flow to support the project economics even at a relatively low contract price.

The buyers were willing to undertake the volume commitment, but they needed to be assured that the price paid to the sellers would remain viable over the long term – even as changed market conditions affect the price that they can obtain when reselling downstream in the end-user markets.

The problem is simple: if, for example, the price that the buyer is paying upstream to the supplier is more than the price than the buyer can receive downstream from the end users, then a price decrease is required because otherwise there is no margin, there are losses and the buyer will quickly go out of business. Conversely, if the price that the buyer is paying upstream to the supplier is sufficiently lower than the price that the buyer can receive downstream from end users, the seller may not be enjoying the benefit of its bargain.

The parties therefore must reach a balance. That balance is achieved when the contract price is defined by reference to the price that end-users pay for natural gas in the market where the gas is delivered. The objective is that the contract price that the buyers pay to the sellers will self-adjust, according to a formula, as end-user prices evolve over time.

And here is the crux of the issue: how do sellers and buyers arrive at a contract price, which will govern for decades to come, such that it will adequately track the changing value of gas in the end-user market? The answer, in general terms, is through a netback formula.

A netback formula references a reliable natural gas price marker (such as a hub price, a reliable published price, or a portfolio evaluation) and then deducts certain costs and allows for a margin. For example, gas sold to the US gas market has been sold at a price tied to US traded gas prices – such as Henry Hub – thereby ensuring that the price remains aligned with the conditions under which the gas can be sold into the downstream market.

Historically, however, this option was not available in many gas markets. When Asian and European importers first began contracting for natural gas supplies, there were no developed natural gas markets in their countries. The importers – the buyers (typically government-owned monopolists) – were creating demand downstream by importing gas and selling it to consumers in competition not with other natural gas (because they were the monopolist gas companies and there was no gas-to-gas competition) but, rather, with other competing fuel products – primarily oil products.

To gain market share, gas therefore needed to be priced at a discount to those competing fuels. Prices for gas were commonly defined by the government on the basis of supply costs – that is, the price that the buyers paid the sellers under long-term contracts. As a result, there was no independent gas price reference in the destination market. When the buyer and the seller were at the negotiation table discussing what price the buyer would pay to the seller over the life of the contract, they could not simply put into the price formula a gas price reference. There was none. Instead, they often included a reference to the price of competing oil products. In this monopolist market, displacement of oil and other competing fuels would allow the monopolist to sell the gas downstream.

In short, pricing by reference to these competing fuels was the best option to track the competitive dynamics of the downstream natural gas market. As reflected in these contract price formulae, oil and oil-derived products served as a proxy for the ‘value’ of natural gas.

To establish this proxy pricing, buyers and sellers often agreed to a contract price with two fundamental components: first, a fixed base value referred to as ‘P0’; and second, an indexation component tied to the evolution of oil-derived products. This latter component, called an ‘escalator clause’, is a multiplier to the base value that allows the contract price to fluctuate during the term of the contract in accordance with the price movement of the oil products.

Proxies, however, are necessarily imperfect. Commodity markets are not static over time, and there will be changes in the gas market that will not be reflected in, and therefore not captured by, the imperfect oil proxy in the price formula.

Thus was born the price review clause. It is a clause that allows either party to seek revision of the contract price if the conditions underlying the commercial bargain significantly change over time. This is the fundamental trade-off between the take-or-pay commitment of the buyer and the right to periodically realign the contract price to conditions in the destination market.

Although the terms of specific price review clauses differ, they often:

  • specify a certain number of regular price reviews, which can be initiated at the request of either party at specified dates;
  • specify a certain number of ‘wildcard’ price reviews, which can be initiated by either party at any time;
  • require that a price review be initiated by filing a price review notice with the other party;
  • provide that the price review notice starts a mandatory negotiation period (usually three, four or six months);
  • impose certain requirements that must be satisfied before the price formula can be modified, often a significant change in the market of the buyer that occurred since the current price formula last became effective that:
  • affects the value of natural gas;
  • is non-temporary in nature; and
  • requires an adjustment to the contract price (i.e., the economic impact of the change is not already reflected in the current price formula);
  • if these preconditions are satisfied, specify that the price formula should be revised in accordance with certain requirements:
  • the revision should take into account the economic impact of the changes that gave rise to the price review;
  • the revision must allow the gas to be sold competitively in the market, at a reasonable marketing margin, and/or such that the buyer may market the gas economically in its end-user market;
  • the revision should assume sound marketing and efficient management by the buyer.
  • specify the revision is retroactive to the date of the price review notice;
  • specify that the parties must calculate the difference between the revision and the former price (already paid by the buyer) for that period;
  • if the revision results in a price reduction, provide that the seller owes the difference to the buyer for that period;
  • if the revision results in a price increase, provide that the buyer owes the difference to the seller for that period;
  • if the parties cannot reach agreement within the mandatory negotiation period, provide that either party may submit the matter to international arbitration.

Contracts that include price review clauses typically include ICC, SCC or UNCITRAL arbitration provisions and provide for three arbitrators. The seat of arbitration is often New York, London, Geneva, Paris or Stockholm. Arbitral awards revising a contract price or rejecting a request for revision are enforceable under the New York Convention – although enforcement is rarely required because of the parties’ ongoing commercial relationship.

These price review clauses started to become standardised in the 1980s, when contracts were signed concerning the Norwegian Troll gas field. These so-called ‘Troll contracts’ were organised through a centralised process, by which all producers (and the Norwegian government) and all the buyers (which operated through a consortia) were involved in the negotiations. As a result, a standardised form of agreement was used, which included the price review language. In the decade that followed, other buyers and sellers adopted the same or similar language in other long-term supply contracts – and the price review clause become more or less industry standard in Europe.

These price review clauses – now in place in long-term gas contracts across Europe – set the stage for what happened next.

The first wave of price reviews

On 22 June 1998, the European Commission – following years of preparation – promulgated Directive 98/30/EC relating to the liberalisation and deregulation of the natural gas markets of EU member states. The Directive sought to encourage competition in the then largely monopolistic European gas markets. It sought to do so by (1) allowing third parties open access to natural gas transmission facilities, and (2) permitting consumers to choose their natural gas supplier and to negotiate prices. The European Commission stated that the liberalisation of the European natural gas markets would lead to increased competition and that ‘[a]s competition increases with the progressive development of the internal market for gas, prices are expected to fall.’[1]

In the years that followed, member states took a variety of measures in their national legal orders to implement the Directive. In many countries, the national legislation sought to achieve ‘unbundling’ – the process of functionally segregating gas marketers from operators of gas delivery and storage facilities, which enabled competition by giving competitors non-discriminatory access to the gas system. Liberalisation proceeded at different paces in different member states.

Change was afoot. The liberalisation efforts started to move the EU gas markets from a system where there was only one monopolistic buyer in each country selling downstream, to a system where numerous competitors would participate in the market, sign contracts with suppliers like Gazprom and Sonatrach, and compete with other buyers to sell to the downstream market, underbidding each other to gain market share. The aim was that the downstream price paid by the end users would not be set by the supply price but, rather, by the competitive dynamics in the end-user market itself.

There also was another, more subtle change. Whereas buyers had previously sold gas downstream in the competition with oil-based fuel products, they were now selling the same gas downstream in competition with other natural gas suppliers (i.e., gas-to-gas competition). This caused a problem for the buyers. With the barriers to competition crumbling, competitors could enter the market for the first time and offer prices at a discount to what the monopolist incumbent had been charging. At the same time, the price that buyers were paying to sellers under the long-term contracts were still tied to oil prices set at a level before gas-to-gas competition existed. This disconnect between what the buyers were paying upstream and what the buyers were receiving downstream created the archetypical situation that the price review provisions were intended to address. And arbitration commenced.

The authors were involved in one of the first of the price review arbitrations in the early 2000s. The claim was that the liberalisation of the relevant European gas market broke up the importer’s monopoly and for the first time created gas-to-gas competition when new competitors entered the market and began offering prices at a discount to the previously prevailing prices. We therefore sought the addition of a new component to the pricing formula to reflect the new development of competition in the relevant gas market.

The tribunal agreed. It lowered the contract price formula by introducing a ‘correction’ factor into the formula – a factor to correct for the decrease in the market gas price that the oil-linked contract price did not track. Importantly, however, the tribunal left the pricing formula tied to oil products because, at that time, there was still no liquid gas index in the relevant market that could reliably represent the price for natural gas on any given day. The tribunal therefore left the price formula tied to oil products, but changed the price level to reflect the gas-to-gas competition price in the market.

Other arbitrations followed, most resulting in significant price decreases for the buyer.

The second wave of price reviews

A second wave of price reviews was initiated – again primarily by buyers – in the wake of what many described as a ‘perfect storm’ of price-depressing events that occurred from 2008 to 2010. Two events in particular converged to create this situation.

First, the sudden impact of the global economic crisis swept across Europe and was fully brought to bear on the European gas market. The economic effects of the crisis caused gas demand to decline relative to projected growth and expanded import capacity, leaving gas companies under take-or-pay obligations to fiercely compete with each other in a desperate attempt to sell their volumes.

Second, new and unexpected volumes flooded the European market. One of the key contributors to this increased supply was the US shale gas boom, which resulted in LNG destined for the US market being diverted to Europe. Based on higher prices in Europe and transportation limitations, companies – under take-or-pay obligations – began unloading volumes in Europe, which became a ‘sink’ market. This supply-demand imbalance led to a gas glut.

These market changes had an important effect. The increased quantities of natural gas being unloaded in Europe caused increased liquidity and reliability in the European natural gas hubs. And with the influx of gas being traded at these European hubs, the hubs began to rapidly mature.

Despite this increasing maturation of European gas hubs, however, the market prices in many European markets still remained largely tied to oil products. As a result, most (although not all) of the price reviews in this second wave resulted in a decrease of the contract prices to reflect the reduced level of gas prices, but still left the prices tied to oil products.

This was no small event. The buyers that achieved downward revisions to their supply prices included:

  • Bulgargaz (Bulgaria)
  • Centrex (Austria)
  • Conef Energy (Romania)
  • DONG (Denmark)
  • EconGas (Austria)
  • Edison (Italy)
  • Eni (Italy)
  • E-On (Italy)
  • Gas Natural (Spain)
  • GasTerra (the Netherlands)
  • GDF Suez (France)
  • PGNiG (Poland)
  • RWE (Germany)
  • Shell Energy (the Netherlands)
  • WIEH (Germany)
  • WINGAS (Germany)

Each of these buyers obtained price reductions in their long-term contracts based on the evolution of the European markets. The prices paid by end users were now no longer set by supply costs. Rather, the reserve had happened: the supply costs were set by the end-user prices through the price reviews.

The third wave of price reviews

A third wave of price reviews followed several years later. In this third wave, the buyers argued that the gas hubs had developed and matured in much of Europe to the point that they had significant traded volumes and transparent prices. This allowed hubs to act as a price-setting mechanism in the markets that they serve.

As a general principle, the more significant the volumes traded on a hub, the more ‘liquid’ – and reliable and transparent – its price reference becomes. A ‘liquid’ price is one that is not easily influenced by a small number of trades because of the large overall volumes traded. An ‘illiquid’ hub, by contrast, is more prone to price volatility because of the ability of a small number of trades to influence the average price more quickly. The growth of liquidity at a trading hub also facilitates increasingly transparent prices because of the higher number of trades made at the hub.

The continental European hub that became the most liquid during this period was the Title Transfer Facility (TTF) in the Netherlands. By 2009, traded volumes at the TTF had grown sufficiently that the TTF was regarded as an open and liquid gas trading hub. By 2012, the price formation mechanism for many gas contracts in the Netherlands and elsewhere was the TTF price.

Many buyers in this third wave of price reviews therefore asked for the proxy of oil products in the formulae to be replaced by gas hub indexation. It is a matter of public record that suppliers such as the Norwegian producer Statoil and Gazprom have increasingly agreed to include gas hub indexation or reflect gas-hub price levels in their supply contracts.[2] Indeed, the two largest supply contracts into Europe – which are contracts that ENI and E-On have with Gazprom – were revised to include gas-hub indexation (it is public information that the ENI contract is now 100 per cent hub-indexed). And 100 per cent of Statoil’s contracts to northwest Europe have some level of hub indexation.[3]

Several of the arbitrations that are part of the third wave of price reviews are still ongoing – with many buyers in Europe seeking to substitute the oil proxy partly or entirely.

Looking into the crystal ball

As the foregoing shows, the evolutionary path of price review arbitration has been marked by three epochs. During that time, the European gas markets have experienced growing pains, and players in the field have struggled to cope with the evolving energy landscape. International arbitration has played an important role in that evolution.

Focus now turns to the future. As we look forward, some commentators have suggested that there might be a fourth wave of price reviews in which sellers may seek a contract price increase because of the falling price of oil. The historical movements in oil are well known: in 2004, Brent was at US$30-40 per barrel, rose dramatically to around US$140 per barrel in 2008, settled between the US$100-120 per barrel range from 2011 to early 2014, then collapsed in late 2014 and is currently in the US$45-55 per barrel range. Some have suggested that sellers may argue that the prices that the buyers are paying are too low because they are tied to the falling price of Brent.

If those claims proceed, the question will be whether the buyers may still be achieving a relatively high price when it sells the gas downstream. The devil, however, will be in the detail, which will include (but will not be limited to) the nature of the ‘slope’[4] of the contract price at issue – which determines the reactivity of the formula to the movement in oil prices. That chapter in this saga, however, has yet to be written.

Perhaps the more interesting question is whether price review arbitrations in Europe will continue or will slowly die out (which would be sad news for price review lawyers). As European hubs continue to mature, hub indexation will be, through party agreement or arbitral awards, increasingly substituted for the proxy of oil products. And that means that the supply price formulae will better react in real time to natural gas prices in downstream markets, capture market changes in a way that the oil prices could not, and the need for price reviews will be reduced.

In these circumstances, the question must be asked: is there still a reason to include a price review clause if the formula is wholly tied to a gas hub index? Many believe not. They believe that the hub indexation is the cure for everything – and that the market prices will stay in alignment with contract prices that are tied exclusively to hub indexation. There is, however, a more nuanced view: price review clauses may still be important because there is no guarantee that hub pricing will reflect market prices – particularly if the destination market is different than the hub reference.

A simple hypothetical illustrates the point. Suppose companies contracting for the German market wish to include in the contract price a 100 per cent hub reference to TTF in the Netherlands. They wish to do so because they believe the TTF is sending the price signal for market prices in Germany. The parties may therefore change the contract price formula to include 100 per cent TTF hub indexation.

Is there a need for a price review clause? The answer may be yes, because TTF may not always remain a reasonable measure of market prices in Germany. Rather, it may be that TTF ceases being a price signal for market prices in Germany at some point in the future and that the German hub becomes the new sender of the price signal. In that case, the parties would be wise to have the contractual mechanism – a price review provision, albeit perhaps differently worded – to deal with this change in market conditions.

There is another recent event that may further motivate this change. In recent years, the EU commission launched an investigation into Gazprom about whether its contracts with buyers violate EU competition law. One of the European Commission’s charges is that Gazprom is abusing its dominant position in the central and eastern European natural-gas markets. There were several factors behind this charge, one of them that Gazprom’s practice of indexing gas prices to a basket of oil products ‘unduly favoured Gazprom over its customers.’[5]

As a result, future price review arbitrations against sellers may include not only a claim under the contract for hub indexation, but also an EU competition claim. Under the European Court of Justice’s decision in Eco Swiss China Time Ltd v. Benetton International NV,[6] the issue of EU competition law appears to be arbitrable, subject to a second look by a reviewing court after the arbitration (if requested).

In sum, given the European Commission’s view about oil indexation and the increased maturity of hubs, there may be less and less oil indexation in these contracts, more and more hub indexation, and a corresponding decline in price review arbitrations in Europe. But it will take time to get there.

All hope for future price reviews, however, is not lost. There is reason to believe that Asia will become the next Europe. The Asian markets today are where European markets were two decades ago: relatively immature markets in transition, where pricing is still largely tied to oil products. For this reason, the next major battleground in price review arbitration may be Asia (Japan, Korea, Taiwan and China), which was and remains largely unliberalised and where end-user prices are largely set by the supply costs.


While the evolution of price review arbitration has been marked by three periods of increased activity, it is has been – with the exception of a few twists and turns – a more or less linear evolution, as gas markets have matured away from oil indexation and toward hub indexation. International arbitration has been one of the primary vehicles by which pricing disputes have gone about that evolutionary path. As we reflect on that journey and project into the future, the road forward appears to be one of hub indexation in Europe and of Asia being the next major battleground – much as Europe was two decades ago. And that is precisely what the price review clauses are intended to address: changing market conditions that are not reflected in the contract price.


[1]    European Commission, Opening Up to Choice: Launching the Single European Gas Market, p. 17.

Jason Bordoff and Trevor Houser, American gas to the rescue?, Columbia SIPA, September 2014, p. 17.

[3]    Gazprom, 2012 Management Report OAO Gazprom; Jonathan Stern, December 2014: The Dynamics of a Liberalised European Gas Market, p. 19; CGEP, American gas to the rescue, September 2014, p.17.

[4]    A contract price often reacts to a certain-month trailing average price of Brent at a pre-defined rate – a decimal or percentage multiplier known as the ‘slope’. As the certain-month trailing average price of Brent rises or falls, so rises or falls the contract price according to the agreed slope.

[5]    European Commission Press Release, ‘Antitrust: Commission sends Statement of Objections to Gazprom for alleged abuse of dominance on Central and Eastern European gas supply markets,’ 22 April 2015.

[6]    Case C-126/97.

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