The Review of Gas Prices with a Hub Indexation: An Unknown Territory


Since the first edition of The Guide to Energy Arbitrations, long-term contracts for the sale and purchase of natural gas have undergone a process of change. The past decade of price reviews and the proceedings that followed have contributed to this significantly.

In the first edition (following the first wave of price review proceedings in 2010–2012), this chapter explained the basis of and the logic behind the price review clauses, going through the sophisticated mechanisms and complex processes the different tribunals must deal with to reach a solution and what problems need to be resolved before an award may be issued.[2]

In the second edition,[3] corresponding with the second major wave of proceedings (2012–2015), a process of transition in long-term sale and purchase contracts had already begun, with the demand for a structural change of these contracts. These changes included abandoning the historical indexation of the contract sales prices to the oil price and accommodating a more market-oriented formula that takes into consideration the real market levels, at least in Europe. Indeed, this was not new for the United States and the United Kingdom, where this system had been in place for a long time. As noted by commentators, ‘[t]he markets conditions in Europe have some striking similarities to those in the United States in the 1980s and the United Kingdom in the 1990s, leading some commentators to predict the end of long-term oil-linked pricing.’[4]

Parties to long-term contracts were seeking a more market-oriented pricing mechanism to eliminate the risk connected with oil indexation.

These transition processes have involved both the ‘old’ existing contracts, made through the agreement of the parties or the awards of the tribunals, and the ‘new’ contracts entered into more recently, where the indexation of the contract sales price to oil has been replaced by indexation to market prices, namely to the Title Transfer Facility (TTF)[5] in Europe, and to the Henry Hub[6] in the United States. These more recent long-term sales and purchase contracts do not contemplate any sort of price review clause. There is no need for them.

This new trend has already been recognised by commentators.[7]

This edition’s chapter will explore the methodology to be applied by arbitrators in the case of review proceedings of contract sales price based, partially or totally, on hub indexation.

Indeed, the first two rounds of price reviews were in general seeking a review of what is known as the ‘Po’ element of the contract sales price. The new contracts seem to be oriented differently. The main reason for this is that the contract sales prices in the existing long-term sales and purchase contracts were disconnected from market prices, and this disconnection was obvious with the occurrence of decoupling. Indeed, a new trend appeared as gas-on-gas competition began to seem old-fashioned. During the early years of the gas industry in Europe there was the need to link contract sales prices to competing fuels in the absence of liquid trade markets. Following the European gas market liberalisation, and the subsequent creation of several gas trading hubs where the gas prices reflect the market value of gas, this approach is today considered as pertaining to a bygone time.[8] Changing the indexation element of the contract price from oil to gas market prices has become key. This has been recognised by the industry[9] and by the regulatory bodies[10] and reflected by the fact that the new long-term gas sales and purchase contracts have changed the indexation formula from an oil-linked to a hub price-level basis.[11] With the indexation of the contract price to the hub level, the parties are not seeking a different value of the price to be paid for the gas delivered, but a change of the price formation mechanics.[12]

The price reopening clauses and their application by the arbitral tribunal now need analysis to verify if the clauses still exist and how they should be applied if the contract sales price is linked to the hub prices. This will be done by analysing the price review decade that began in 2010; by explaining the development of the long-term gas sales and purchase agreement; and by explaining the new issues arising in the drafting and proceedings related to contract price revisions when indexed to the hub prices.

Changing the contract price with a hub indexation

In the previous edition, this chapter concluded by raising the issue of the right of parties to a long-term gas sales and purchase contract to request a change of the contract sales price when indexed to a hub level, rather than to oil.[13] In this edition, we will attempt to address that issue.

Gas long-term sales and purchase contracts are no longer just oil-linked. In the United States and the United Kingdom the contract sales price has for a while generally been linked to hub prices, with an adaptation to market prices that generally does not require a price review process,[14] and today the long-term contracts with a delivery point in Europe have also begun to change indexation. This is ‘the change’ that will be discussed further in this chapter and it is an historic change, at least with regard to the gas and LNG market in continental Europe. The main reasons for this transition to the contract sales price indexation were the role of the LNG and shell gas produced in the United States, and the impact of several awards issued in the period 2010–2015 that highlighted the obsolescence of the indexation of the contract sales prices to oil and the problems arising from the decoupling of such prices from market prices. This change has affected existing contracts as well as the new long-term contracts entered into in the past few years.

Gas price review provisions were traditionally incorporated in long-term gas sales and purchase agreements where the contract sales price was fully linked to oil products, and therefore could become disconnected from market prices where the contract sales price did not adapt automatically to the reality of the market.

From the outset of the gas industry in the 1960s, for a period of almost 40 years, take-or-pay contracts were entered into when no real market for gas existed in Europe, and therefore no transparent reference price could be used to determine the gas price delivered under any such contract. With the liberalisation of the gas industry in continental Europe in the past decade, several gas trading hubs were created where the gas market prices were transparently published. However, the need for change was not yet perceived as necessary, as such indexation was working peacefully with the oil prices moving at the same pace as the market prices.

Consequently, gas sold under these contracts in continental Europe continued to be linked to the price of competing fuels in the energy market, such as oil and oil products.

Since 2008, the economic crisis, the decrease of oil prices and shale gas and other factors[15] have ‘resulted in events never seen before in international gas commerce with virtually all buyers seeking radical renegotiation of prices and a major increase in international arbitration’[16] and ‘consequently, gas supply agreements that link the contract price to oil prices risk departing significantly from the real market conditions affecting the parties. [A]s a result, an increasing number of buyers have triggered the price review mechanisms in their gas supply agreements.’[17] For others ‘[t]he international gas markets are currently in the eye of another perfect storm.’[18]

This decoupling has triggered price reviews under many European gas long-term sales and purchase contracts.

The traditional gas long-term contracts embed a price review clause[19] to mitigate the volume risk taken by the buyer. The structure of such contracts is that the seller takes the price risk (periodically), while the buyer takes the volume risk (daily) through the take-or-pay provisions. No buyer would have entered into a long-term contract with a minimum take of the products close to the entire contractual volume where the contract price was not linked to the market prices, without the right to periodically reopen the price. This structure was widely accepted in the industry.[20] However, there was no standard clause.[21]

The clauses were the result of negotiations between sophisticated parties. Such parties would deliberately decide to have a vague price review clause, mainly because neither of them wanted to restrict themselves in a long-term contract to provisions that one day may become outdated.

The most recent long-term sale and purchase contracts for the delivery of gas/LNG to continental Europe are more oriented to include the hub indexation in lieu of oil, incorporating a structure that does not contemplate any sort of right to reopen the contract price. This change has had the effect of modifying the nature of such contracts from a take-or-pay to a take-and-pay structure, especially because such contracts bear, together with the deletion of the right to reopen the sales price, the elimination of any form of flexibility, namely the make up rights of the buyer, and the introduction of the 100 per cent take-and-pay level. This new structure can be found in all long-term contracts for the delivery of LNG from the United States, as well as in some of the most recent contracts to import gas to continental Europe from other parts of the world.

Under this scheme there will not be price review requests and arbitrations any more. Consequently, the issues in a price review of a hub link contract price would regard the take or pay contracts entered before the change only. The contracts that maintain the ‘old’ price review clauses still represent as of today, and will represent for a period of at least a decade, the clear majority of the long-term sales and purchase contracts for the delivery of gas/LNG to continental Europe. The original contract price formula of these contracts incorporated a reference only to the oil indexation.

As explained above, some of those formulas, following the incredible situation created by the decoupling and the very many proceedings that followed, were then changed to incorporate a total or partial indexation to the hub prices. The price review provisions of those contracts will be examined in the present chapter.

It is widely accepted that the price review process is based on a very specific step-by-step procedure, whereby the failure by the claimant to pass any of the steps will have the effect of putting to an end the process or the arbitration. In this procedure, the first step is to determine if there were changes (also defined as ‘triggers’) in the given period of time (the Review Period); the second to determine if those changes have affected the relevant market value of gas; the third is meant to adjust the contract sales price in such a way that the new price would meet the criteria set forth in the clause (e.g., marketing the gas economically, competitively) also known as the ‘market test’, the fourth and final step.

The first decision that the arbitral tribunal must face in proceedings regarding a price review of a contract price indexed to the hub prices would be to decide if the widely recognised four-step procedure, applicable to the previous price reviews, should still be followed.

It is prima facie evident that the arbitral tribunal must decide and deliberate on the process of interpretation of the contract to be able to issue the award. However, this is not an easy task. It represents for the arbitral tribunal the first crossroads of the proceedings. Indeed, the change of the indexation in the existing contracts has not likely implied a modification of the price review clause, which remained unchanged. The arbitrators would likely be asked to adapt the ‘old’ price review formula implemented for oil-linked prices to the new reality of hub-linked contract prices.

It could be argued that in any such gas review there is no need to run the entire four-step process: it would suffice to move the analysis directly to the third and fourth steps. The reasons behind such an approach would likely be that, being the contract price set forth in a formula indexed to the hub, the existence of the changes (step one) and their effect on the market value of gas (step two) are not to be proven and therefore they should not be taken into consideration. Under this theory the changes of market prices would represent per se a change that would trigger the gas price review without the need of any further evidence.

However, this approach would constitute a major disruption in the interpretation of the take or pay contracts. It would be against the language of the contract, which traditionally would make express mention to the term ‘change’. It would also likely be against the logic of the change of the indexation, which was introduced to intervene on the price formation mechanism, not on the evaluation of the price levels.

The first step of this process (i.e., to determine if significant changes have occurred during the review period) should remain the same, as it should not be affected by the price formula indexation of the contract. The claimant should always have the burden of proof to demonstrate that a change to the market conditions has occurred. This first step should, in practice, remain unchanged.

‘No change, no revision’ is the golden rule that has always been applied in the revisions of the contract price when indexed to the oil price, and the reasons to modify its application because of a change of the indexation are unknown.

A change in the market value of gas or in the margins made by the buyers at the selected hub should not constitute a change per se.

It is in the review period, a looking backward exercise, where the arbitrators should find the existence of the events that are claimed to constitute the triggers put forward by the requesting party and qualify them as relevant changes for adjusting the price, if any. If the arbitral tribunal would assume that the change of value of gas at the hub set forth in the price formula could constitute per se a change, that would raise some issues pertaining to the review of the gas price linked to the oil. For instance, one would be on the market segmentation that should be taken into consideration by the arbitrators: which market prices? The prices obtained or obtainable by the buyer?

Another issue concerns the long-lasting effect: would that be still relevant? If not, the definition of the review period would become meaningless, as the point in time at which the change in the market value occurred and its duration would be ignored.

As already explained, the second step is to verify if such changes are not reflected in the contract sales price, and the third is to determine whether the buyer is able to economically market the gas, and both these steps take place at the review date.

These two steps should not be affected either in a price review request of a contract price based on the hub level. Indeed, the test necessary to run the check on steps two and three, namely the delta-of-delta test, are based on the value of the margins of the buyer on the market value of the gas in the given market. They are a matter of fact. It is a comparison between the contract sales price and the margin made by the buyer and the market prices at the beginning and at the end of the review period.

In practice, the result of the delta-of-delta methodology of a contract price indexed to the hub prices shall always be zero. Indeed, the margin of the buyer will remain the same if the formula provides for a hub price minus a certain value. For instance, if, at the beginning of the review period, the formula was TTF-2 €/c, at the end of the period the buyer’s margin would still be €/c 2 per scm. If the formula was TTF or TTF plus or without a value, the same would follow with the delta-of-delta result being equal to zero. The absolute contract price determined by the application of the formula and the price level in the market would be irrelevant to the arbitrators.

Finally, if the result of the delta-of-delta methodology was zero, it follows necessarily that already steps one and two would not have been passed: if there were no changes in the margins, it would mean that there were no changes to affect the contract price.

Under this interpretation, it could be argued that the claimant would be unlikely to find any solid argument to sustain any request to increase or decrease the contract sales price.

In such a scenario the question would be if the request of a price review should then be dismissed, or if the arbitrators should find a different approach ignoring the four-step process and consequently disregarding the changes and the delta-of-delta methodology.

In theory, there could be one alternative approach based on the principle of a guaranteed margin in favour of the buyer. This principle belongs and is implied in the new generation of contracts whereby no reopening of the price is contemplated and whereby the structure of the contract is that of a take-and-pay contract rather than of a take or pay.

Theoretically, guaranteed margin should not be permitted in a price review related to a contract with a price linked to the oil. Such take-or-pay contracts should not embed such principle. It has already been raised unsuccessfully in the contracts with a full oil indexation where the arbitral tribunals decided that the guaranteed margin was not contemplated by the contracts and that the oil linked price would have not granted such margin to the buyer.

Indeed, the theory of the guaranteed margin is eventually one of the most probable defences used in the take-or-pay contracts where the indexation was moved, totally or partially, from oil to hub prices.

This would be a difficult point to be resolved by the arbitrators.

The arbitral tribunal could be asked to deliberate if the value deducted or added to the hub price is still reflecting the market conditions as of the time when it was agreed by the parties; and under such circumstances how the value should be updated. In essence, the arbitrators should decide which methodology should be applied to run the former step three, and more importantly, step four, the market test.

This is and would be a new crossroads that the arbitrators would have to cope with in the proceedings related to the revision of a contract price indexed to the hub prices. Probably the most important. It would require the adoption of a new methodology as of today unknown, if this issue could be debated at all.

Indeed, the contract price indexed to a hub would inevitably result in an automatic adaption formula agreed by the parties. If it is automatic there should not be the possibility to change the sales price without the agreement of the parties.

One further attempt to resolve the dilemma about the right to reopen the price linked to the hub where there is still an old price review clause, might be to take the position that the margins made by the buyer are higher than those made by the other players in the market at the end of the review period, compared to those made by the same at the beginning of such period.

Assuming that the arbitral tribunal has decided, ignoring the four-step methodology and the issue of the guaranteed margin, to run a different process which would take in to consideration the margins of the buyer only, not per se, but in relation to the margins of the other comparable buyers, how this process should be run is unclear. The process to be followed under these circumstances by the arbitrators is an unknown territory.

However, the result would likely be that the arbitral tribunal shall limit its analysis of the price review process to the market test, the former step four, exclusively.

This would represent a major deviation from the language of the contract, which would inevitably result in an interpretation of the price review clauses, and this would have the effect of rewriting the contract for three different reasons.

First, the arbitrators would not follow the prevalent interpretation criteria based on the interpretation of the literal language of the contract price review clause, ignoring words such as ‘change’ and ‘maintain’ for instance, which would dismantle the four-step methodology agreed by the parties and widely accepted. Arbitrators should be able to find a different meaning to the content of the old price review clauses.

Second, the risk allocation agreed by the parties with the contract would also result in a major disruption: with the oil indexation the buyer takes the volume risk through the take-or-pay provisions and the seller the price risk with the price reviewed periodically – three years usually represents the interval between the sequence of price reviews. In a contract where the contract price is indexed to the hub prices the buyer risk has not changed, while the seller risk is not changed either except that the risk is not taken every three years any more, but rather monthly as the indexation on the hub is calculated on the average prices of the month ahead of the delivery of the gas.

Third, taking into consideration only the comparison of the margins made by the buyers and the other players on the market at the beginning and at the end of the review period, it would require few decisions on further points on the comparability between the buyer and the other players (e.g., their customers, prices and costs).

A different case is represented by a take-or-pay contract whereby the parties have agreed to change the indexation formula only partially; for instance, to maintain the oil indexation for a quantified quota together with a partial indexation to the hub prices for the other part of it. This approach is entirely possible. How then would the price review work in such cases? It could be assumed that the portion of the price linked to the oil prices would follow the ‘old’ four-step methodology and the part indexed to the hub would remain unchanged, provided, however, that at the end of the process the sum of these two prices would pass the economic test (e.g., to allow the buyer to maintain a reasonable marketing margin).


After a decade of gas price reviews, the contractual framework of long-term sales and purchase contracts seems to have commenced a transition process from the system created more than 50 years ago when there was no comparable commodity to gas other than oil.

The awards rendered in the past 10 years have significantly contributed to highlighting the fact that the relationship between gas and oil prices is as of today outdated. The occurrence of decoupling is the most important evidence of that change.

The drafters of gas long-term sales and purchase contracts seem to have recognised the need to implement a different contractual framework by introducing, in the most recent contracts, in the price formula a full or at least partial indexation of the gas price to market prices, and further recognising that there is no longer a need for price review and flexibility clauses. In other words, changing the nature of these contracts from take or pay to take and pay by changing the price formation mechanism.

This new tendency has also been reflected in some of the existing contracts, whereby the indexation to oil has been substituted totally or partially with that to the hubs. This is a very well-known theory across Europe.[22]

Take-and-pay contracts, by their nature, should no longer be subject to price review requests and proceedings.

However, take-or-pay contracts will still be subject to gas price reviews, especially for those that remain totally or partially unchanged and unaffected by the ongoing transition process, and for those contracts the review process will remain the same as in the past.

For those take-or-pay contracts where the parties have agreed to introduce a total or partial indexation to the hub prices, the situation, as explained above, will be more complex.

Indeed, the arbitrators will have to cope with new issues and problems in issuing their awards. Their most important decision would be around the methodology to be followed to review the contract price.

If the widely accepted four-step system still applied, it would be unlikely that the contract price could be changed as the process may come to an end at step one or two because of the impossibility of demonstrating the existence of changes during the review period or that such changes have affected the economic ability of the buyer to market the gas and its margins.

Should the arbitrators decide to use a different process to decide on gas price review requests, it would require a completely new approach without ignoring inter alia the applicable rules of interpretation of the contracts, the language of the contract, and the precedent awards. What could be such a new approach is very difficult to predict, as of today, since it would take the arbitrators into an unknown territory.

However, for the time being, with the transition from price formation mechanisms linked to oil to ones linked to hub prices, price review disputes seem to have calmed in continental Europe.


[1] Marco Lorefice is a senior lawyer with Edison Spa.

[2] The Guide to Energy Arbitrations, edited by B Rowley and published by Global Arbitration Review, 2015, at pages 161–172.

[3] The Guide to Energy Arbitrations, edited by B Rowley and published by Global Arbitration Review, 2017, at pages 185–193.

[4] B. Holland and P. Spencer Ashley, ‘Natural Gas Price Reviews: Past, Present and Future’, Journal of Energy & Natural Resources Law, Vol. 30, No. 1, 2012, page 42.

[5] The TTF is a virtual trading point in the Netherlands.

[6] The pricing point for natural gas contracts futures traded on the New York Mercantile Exchange (NYMEX) and the OTC Swaps traded on Intercontinental Exchange (ICE).

[7] Dr V. Nemov, Gas Hub and Oil-indexes prices: still bound together; Institute of Energy for South East Europe, 2018. H. Rogers, Does the Portfolio Business Model Spell the End of Long Term Oil -Indexed LNG Contracts? April 2017. L. Franza, Long Term Gas Import Contracts in Europe, the evolution in Price mechanism, Clingendael International Energy Programme, 2014/08. G. Cervigni, Oil Indexation versus Hub Based Gas Pricing, REKK Regional Centre foe Energy Policy Research, Visegrad 8-9-March 2018.

[8] A traditional contract sales price clause would read, for example, as follows: ‘Contract Sales Price (US$/MMBtu) = Po + (G-Go)+(LSFO-LSFOo) + (GR-GRo)+ (HSFO-HSFOo)- BR’.

[9] For example, in Italy Eni Spa has stated that as of the end of 2015 approximately 70 per cent of its portfolio (22.46 Bcm) is hub-linked in Eni, Relazione Finanziaria Semestrale Consolidata al 30 giugno 2016, at page 51.

[10] According to the Italian Regulator AEEGSI, about 50 per cent of the gas imported into Italy on a long-term basis (over five years) was hub indexed in 2015 ‘Relazione Annuale sullo Stato dei Servizi e sull’Attività Svolta’, of 31 March 2016 at page 126.

[11] The gas to be imported into Italy from Azerbaijan through the tap pipeline has been negotiated on hub prices; see Il sole 24ore, Gas azero a prezzi sganciati dal petrolio, 11 April 2014.

[12] An example of contract sales price formula with hub indexation would be: Contract Sales Price= TTF-D
where: TTF is for each month of delivery the arithmetic average of the ‘Heren Price’, expressed in €/MWh, for all days of the relevant month. Each day, the Heren Price shall be the arithmetic average of the bid and offer prices under the title ‘TTF Price Assessment’, as published in the ‘ICIS Heren European Spot Gas Markets’ of the closest previous London business day, for the following trading products:

  • ‘Day Ahead’, if the concerned day is a London business day;
  • ‘Weekend’, if the concerned day is not a London business day.
and D is the x.y euro/MWh converted monthly from euros to US dollars.

[13] The Guide to Energy Arbitration, 2nd edition, edited by B. Rowley and published by the Global Arbitration Review, 2017 at page 192.

[14] G.Von Mehren, Gas Price Arbitrations: A Practical Handbook, 2014; edited by M. Levy, Published by Global Law and Business-Global Business Publishing Ltd, at page 91.

[15] For a more detailed analysis see Prof J Stern, Gas Price Arbitrations: A Practical Handbook, 2014; edited by
M Levy, Published by Global Law and Business-Global Business Publishing Ltd, at page 5; AJ Melling, Natural Gas Pricing and its future: Europe as the battleground 2010.

[16] ibid. at 6.

[17] R. Power, Gas price review: is arbitration the problem?; posted on 13 March 2014 in Berwin, Leighton Paisner Expert Legal Insight with reference to recent price review cases.

[18] B Holland and P Spencer Ashley, ‘Natural Gas Price Reviews: Past, Present and Future’ Journal of Energy & Natural Resources Law, Vol. 30, No. 1, 2012, page 35.

[19] A traditional price review clause would read: ‘Each of the Parties shall be entitled to request a revision of the applicable Contract Sales Price, provided that the market of the country of final destination of the Natural gas shall undergo changes of such nature and extent that would justify a revision of the Contract Sales Price to enable the Buyer to maintain a reasonable marketing margin assuming the application of the principles of sound marketing practices and efficient management by the Buyer.’

[20] Ana Stanič and Graham Weale, Changes in the European Gas Market and Price Review Arbitrations, page 325, Journal of Energy and Natural Resources Law, Vol. 25, No. 3 (2007); International Energy Law and Policy Research Paper Series Working Research Paper Series No: 2010/03, Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee (24 February 2010); Anthony J. Melling, Natural Gas Pricing and its Future. Europe as the battleground, (2010); Morten Frisch, Current European Gas Pricing Problems: Solutions Based on Price Review and Price Re-Opener Provisions, page 17, International Energy Law and Policy Research Paper Series Working Research Paper Series No. 2010/03, Centre for Energy, Petroleum & Mineral Law & Policy, University of Dundee (24 February 2010); Jonathan Stern, Continental European Long-Term Gas Contracts: is a transition away from oil product-linked pricing inevitable and imminent? page 16, Oxford Institute for Energy Studies (September 2009).

[21] B. Holland and P. Spencer Ashley, Natural Gas Price Reviews: Past, Present and Future, Journal of Energy & Natural Resources Law, Vol. 30 No. 1 2012, page 34.

[22] Luca Franza, Long Term Import Gas in Europe-The evolution in Pricing Mechanism, CIE paper 2014/2018 at page 11.

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