Gas Price Review Arbitrations
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Gas price review proceedings may appear, at first, less complicated than they really are. The disputes generally concern the interpretation of a single clause in a contract, which is traditionally written with extremely vague language. It is not just a legal dispute. Rather, a significant part of the dispute – indeed, the most relevant part – is based on market economics, algebra and sophisticated calculations. This is what makes disputes arising from the interpretation of price review clauses so fascinating. It is not common to find cases in which so few legal terms have given rise to so many different contractual interpretations and economic analyses. And it is on the basis of this simple, vague clause that counsel and experts write thousands of pages in their respective submissions.
The scope of this chapter, based on the personal experience of its author in price review arbitrations and long-term gas sales and purchase contracts, is to identify and address the main issues that represent the ‘crossroads’ of price review proceedings (i.e., the inflection points in the analyses of price review tribunals that drive the outcome of these extremely important cases). The new edition of this chapter expands its prior scope to reflect the author’s most recent personal experiences. In particular, this edition includes new points on the trigger phase (steps 1 to 3) and on its relationship with, and the modification of, the contract sales price in the adjustment phase step 4), as well as a detailed analysis of several preliminary issues relating to jurisdiction and admissibility.
Gas price review proceedings have some peculiarities linked to the right of either party to a long-term gas sale and purchase contract to request, periodically, a price review – often every three years. Res judicata and venire contra factum proprium are principles that arbitrators often have to address in these proceedings, as it is entirely possible that during the life of these types of contracts there will be a number of awards interpreting the same contractual clause, and the buyer and seller can change sides as claimant and respondent.
At the outset, it is useful to provide some preliminary explanations to fully appreciate the nature of price review disputes.
Gas price review provisions are traditionally incorporated in long-term gas sales and purchase agreements in which the contract sales price is fully or partially linked to oil products and, therefore, can become disconnected from gas market prices. This disconnect occurs because the oil-linked contract sales price does not automatically adapt to the reality of the gas market. The price review clause thus allows the parties – or, failing their agreement, an arbitral tribunal – to realign the contract price to gas market conditions at periodic intervals during the life of the contract.
Traditional long-term gas contracts that contain a price review clause are thus based on a certain risk allocation. Under this risk allocation, the seller takes the price risk (periodically) through the price review clause, while the buyer takes the volume risk (yearly) through the take-or-pay provisions. Few buyers would enter into a long-term contract with a minimum take obligation close to the entire contractual volume when the contract price is not directly linked to gas market prices. This risk allocation is widely accepted in the industry.
Currently, the long-term gas sales and purchase contracts that are oil-linked are generally limited to specific geographical areas, such as parts of continental Europe and Asia (although this may change in the future). In other parts of the world, such as the United States and the United Kingdom, the contract sales price is generally linked to hub prices with an adaptation to market prices. These contracts generally do not require a price review process.
Long-term contracts with a delivery point in Europe have also begun to change indexation from a fully or partially oil-linked price to a hub-indexed one. This historic change in continental Europe is discussed further in this chapter. The main reasons for this shift to hub indexation are (1) the role of liquefied natural gas (LNG) and shell gas produced in the United States, (2) the impact of several arbitral awards issued in the period 2010–2015 that highlighted the diminishing appropriateness of oil indexation and (3) the problems arising from the decoupling of oil-linked prices to gas market prices. These changes have affected both existing contracts and new contracts.
The reasons behind the historic approach of oil indexation relate to the liberalisation of the gas markets in Europe. At the outset of the natural gas industry in Europe, countries needed to meet rising energy demands and provide security of supply. Gas-producing companies needed to construct production infrastructure and to find a mechanism to provide a return on their investments. This was possible through the long-term gas sales and purchase contracts in which the seller undertook to sell a certain quantity of gas to buyers, and the buyers committed to take delivery and pay for, or pay for if not taken, the vast majority of gas. These are known as take-or-pay contracts.
When these take-or-pay contracts were signed, 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. As a consequence, gas sold under these contracts was linked to the price of competing fuels in the relevant energy market, such as oil and oil products.
During the past decade, however, liberalisation of the gas markets in Europe has resulted in the establishment of a number of liquid gas trading hubs, which transparently and reliably publish the prices at which gas is traded. Thus, contract sales prices of long-term, take-or-pay contracts have begun indexing to prices at gas hubs rather than to the price of oil products.
The result was a decoupling of the contract sales price under the traditional contracts linked to oil products and the prices of gas traded at the hubs. This triggered price reviews under many European long-term gas sales and purchase contracts.
Starting in 2008, a perfect storm of price depressing events occurred. The global economic crisis, the fall in oil prices, the increase in shale gas and other factors ‘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’. As commentators observed, ‘gas supply agreements that link the contract price to oil prices risk departing significantly from the real market conditions affecting the parties’. As a result, when this storm of events broke, ‘an increasing number of buyers . . . triggered price review mechanisms in their gas supply agreements’.
Since 2008, gas price reviews have become frequent, and there has been an increased interest within the energy industry among practitioners and commentators alike. Only more recently, however, have publications addressed this process in a complete and comprehensive way.
Against this backdrop, the following sections of the chapter provide further insights, based on real cases within the price review mechanism.
Price review process
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.
This is a typical price review clause that can be found in long-term gas and LNG sales and purchase contracts in which the contract sales price is determined by a formula that indexes the price of gas, totally or partially, to the price of oil or oil products. While many price review clauses are similar, the wording of each clause can differ – and sometimes in important ways.
Some clauses may incorporate different or more explicit terms than those included in the above clause, such as ‘value of gas’, ‘market the gas competitively’ or ‘market the gas economically’. They may also refer to specific markets or changes in circumstances that would or would not trigger a price review (for example, by excluding changes in tax law). Other clauses are, to some extent, more sophisticated, providing precise directions to the parties – and to the arbitrators, in the event of a dispute – on the methodology to be followed in determining the new contract sales price. And still others include an ‘in any case’ provision.
Nevertheless, the following sections assess a ‘typical’ price review clause and analyse the new trends relating to the contracts that contain a hub-indexed price.
Price review clauses are the result of negotiations between sophisticated parties. The fact that these parties deliberately decide to have a vague price review clause is primarily due to the fact that neither party wanted to restrict itself in a long-term contract to provisions that one day may become outdated. This is the reason why, in price review arbitrations, counsel to both parties sometimes rely heavily on the applicable law’s principles of contract interpretation.
The reality, however, is that the outcomes of most price reviews do not turn on intricacies of applicable law; they are more often driven by a very specific, commercially based step-by-step procedure. If the claimant fails to pass any of the steps, then the claim fails and no price adjustment is justified. If all the steps are satisfied, however, then the contract price will be adjusted in accordance with the standards of the price review clause.
Generally, the four-step procedure is as follows:
- step 1: to determine whether market conditions changed during the relevant time (the review period) in the relevant market;
- step 2: to evaluate whether those changes have had lasting effects and were not temporary in nature;
- step 3: to ascertain whether those changes affected the market value of gas; and
- step 4: 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., the new price must allow the buyer to market the gas ‘economically’ or ‘competitively’), also known as the market test.
Together, the first three steps constitute the ‘trigger’ criteria and determine whether the contract sales price should be revised – either upwards or downwards. Applying these trigger criteria, the tribunal first verifies if there were long-lasting changes in the market that impacted the market value of gas at the end of the review period. If the tribunal determines that one of the trigger criteria in steps 1 to 3 is not satisfied, then the tribunal should reject the price review claim and the analysis comes to an end. If, on the other hand, the tribunal determines that the trigger criteria are satisfied, then the tribunal proceeds to the final step: the revision of the contract sales price. Even in these circumstances, however, there is no guarantee that the contract sales price will be revised. As explained below, a tribunal may still reject a claim that has passed the first three steps on the basis that the buyer already earns a sufficient profit when selling the gas at the current price at the end of the review period.
The trigger criteria have three distinct components: they consider whether there has been a significant change, whether it is lasting and whether its impact on the value of the market warrants an adjustment of the contract sales price in step 4. The trigger phase thus has both a qualitative part in steps 1 and 2 (considering only whether significant, lasting changes in circumstances have occurred, without quantifying the impact of those market changes) and a quantitative part in step 3 (measuring the economic impact, if any, of the changes identified in steps 1 and 2). In this sense, some have argued that, between the market changes identified in step 1 and 2, there must be a causal relationship with the change in the value of gas of step 3. Practitioners and experts have also argued that the analysis in step 3 determines the direction of the adjustment (whether the contract sales price should be increased or decreased). If an adjustment of the price is warranted under steps 1 to 3, that analysis shows whether in step 4 a price increase or decrease is called for and what the magnitude of the adjustment should be.
Thus, the objective of step 3 is to measure the economic value of the significant changes that occurred during the review period, as identified in step 1 and confirmed as lasting in step 2. Step 3 is therefore the last step to determine whether the triggers for the price review are satisfied. Some have argued, however, that step 3 is relevant not only to determine whether the contract sales price should be revised and in which direction, but also the approximate magnitude of the price adjustment that is needed (subject to adjusting that magnitude to reflect the buyer’s market mix and to satisfy any ‘market competitively’ or comparable requirement in step 4). In this sense, the change in the value of gas established under step 3 becomes the starting point for calculating the adjustment to the contract sales price in step 4.
This approach is sometimes referred to as the ‘trigger adjustment’ connection: that is, the change in market value of gas that occurred during the review period (measured in step 3) must be connected to the adjustment to the contract sales price (made in step 4). Contracts often state this requirement explicitly, requiring that any revision to the contract sales price in step 4 must begin by ‘taking into account the change in [. . .] circumstances’ substantiated in steps 1 to 3. In this manner, step 3 provides the direction of the contract sales price adjustment (up or down) and the magnitude (in €c/scm) from which the step 4 analysis should begin. At that point, the change in the market value of gas during the review period, as calculated in step 3, must be customised to the specific circumstances of the buyer in step 4, ensuring that the buyer is always able to market the gas competitively.
Step 4 thus begins with the quantification assessed at step 3 and adjusts it to account for the buyer’s specific market situation, such as its market mix, and ensures that the buyer can competitively market the gas in Italy. Step 4 then determines the quantum of the contract sales price adjustment based on the above.
Thus, the tribunal does not simply take the result of step 3 and mechanically apply it as the adjustment in step 4. Rather, step 4 tailors the results in step 3 to the specific circumstances of the buyer. Nevertheless, some advocates have argued that the step 3 analysis does impose some constraints on the tribunal in step 4. In particular, those advocates have argued that the direction of the result of step 3 (up or down) cannot be changed in step 4. Put another way, if the step 3 ‘arrow’ points down, then the step 4 adjustment cannot result in a price increase; and if the step 3 arrow points up, then the step 4 adjustment cannot result in a price decrease.
In step 4, many tribunals apply the delta-of-delta methodology. Under this approach, the tribunal looks at the change (i.e., the delta) in the margin earned by the buyer under the contract at the beginning and end of the review period. In this methodology, the difference between the gas market value at the beginning of the review period is compared with that at the end of the review period. This typically occurs in step 3. In step 4, the result in step 3 is compared to the contract sales price at the end of the review period. This comparison is the first delta – in other words, the spread between the contract price and the market value of gas at the end of the review period. This process is repeated for the beginning of the review period to determine the second delta. The comparison of the first delta and second delta, where appropriate, informs the tribunal’s adjustment of the contract price. It is here, in the application of the delta-of delta methodology in step 4, that the directional and quantitative aspects of step 4 are particularly relevant.
One final delta-of-delta issue bears mention. During the life of the contract, the parties in a price review process may have negotiated a revision that contemplates different price levels during the period of applicability. The question arises: which contract price should the parties – or, failing their agreement, a tribunal – use when conducting the delta-of-delta’s approach. In the author’s experience, this issue has come up in a major recent case, and had a material impact on its outcome.
Is a counter-notice required for a counterclaim?
A price review arbitration is not necessarily only for the benefit of the party that initiated the process. The respondent, with a counterclaim, may seek a change to the price but in the opposite direction of that requested by the claimant. Under most contracts, if the buyer has initiated a price review arbitration to decrease the contract sales price, the seller may request an increase to the price without previously notifying the buyer. The reverse is true as well. Some have questioned the admissibility of such a counterclaim based on either the lack of a written price review request or the lack of respect for the mandatory negotiation period often required by the contract. Certain arbitral tribunals have held, however, that a change to the contract sales price, up or down, can be granted irrespective of which party issued the price review notice. Indeed, in the famous Atlantic LNG v. Gas Natural arbitration, the tribunal granted the respondent’s counterclaim for a price decrease, even though the claimant that initiated the arbitration had sought a price increase. English courts have also held that notice provisions do not require both parties to notify each other of the same dispute, that serving a counter notice of the same dispute ‘would serve no practical purpose and be a waste of time and costs’, and that there is no prejudice to the other party if no counter-notice is issued.
This issue deserves a more detailed analysis.
First, questions of jurisdiction and admissibility may be governed by different governing laws: whereas the lex fori might apply in the case of a jurisdictional issue, the lex contractu might apply in the case of admissibility. Second, in a setting aside or enforcement proceeding before national courts, some jurisdictions hold that only questions of jurisdiction, as distinct from questions of admissibility, can be reviewed. The English High Court recently confirmed this principle. In Sierra Leone v. SL Mining Ltd, the High Court concluded that the remedy under Article 67 of the English Arbitration Act 1966 is available only for jurisdictional questions and not for admissibility questions.
Commentators have explained how to distinguish between jurisdiction and admissibility. As Jan Paulsson observed, if the argument is that a claim cannot be brought in a particular forum but could be brought elsewhere, then it is generally a question of jurisdiction; but if the argument is that a claim cannot be brought at all (anywhere), then it is generally a question of admissibility. Consistent with this test, Gary Born has observed that the pre-arbitration procedural requirements, such as the conditions precedent to submit a claim, are generally not questions relating to jurisdiction.
Regardless of whether the question relates to jurisdiction or admissibility, the arbitral tribunal will have the authority to decide the issue. Enshrined in Article 30 of the English Arbitration Act, the doctrine of Kompetenz Kompetenz imbues arbitrators with the power to decide their own jurisdiction and identifies three criteria to determine its scope. Admissibility issues, by contrast, are generally decided by different criteria often originating from the contract.
An example illustrates the point. Suppose that a respondent raises a counterclaim in a price review arbitration without having previously notified its request to the other party. The claimant responds by objecting on the basis that the contract required a price review notice followed by six months of mandatory negotiations and, because the respondent provided no such notice and did not request the mandatory negotiations, its counterclaim should be dismissed. Is this a question of jurisdiction or admissibility? Applying the principles set forth above, it is likely a question of admissibility – and, as such, any decision by the tribunal on this issue may be unreviewable by a competent national court.
It is correct to say that before starting the proceedings, the requesting party shall meet certain conditions precedent, such as the advanced written request of a price review to be notified to the other party, to negotiate in good faith and traditionally to indicate the reasons for the request. This is an obligation of the first party that initiates the process to revise the contract sales price only. Indeed, those conditions precedent represent preconditions to start the process and the proceedings, and do not represent preconditions to the exercise of any party rights. One could then say that these preconditions are preconditions of the claim.
How, then, should this admissibility question be resolved by an arbitral tribunal? We start from first principles. Under most price review clauses, a party that requests a price review must provide a written notice to commence the process, followed by a mandatory negotiation period. Once a party commences a price review, the responding party generally does not need to issue a counter-notice to seek a price adjustment in the other direction. Rather, once a party commences a price review, the process of reviewing the contract price is now open and the possible result is not limited to one direction or the other. At that point, it is the parties’ task – and, failing their agreement, the tribunal’s – to apply the standards of the price review clause, in whichever direction they may lead.
Any other interpretation would lead to serious contractual problems. For example, if a counterclaimant had to file a written notice and then engage in a mandatory negotiation period, there would be two overlapping review periods (which would raise thorny issues of which requested adjustment would apply when), and eventually there would be two price review arbitrations proceeding simultaneously. It is difficult to believe that the parties intend such a chaotic situation on a matter as important as the contract price.
It is no answer to suspend the second arbitration or otherwise prevent it from proceeding. Were that the case, it would lead to the situation in which a party could use a price review request as a tactic to prevent the other from submitting its own price review notice. Precisely because price reviews often can be requested only once every three years, and in a hypothetical scenario where only one price review can be extant at the same time, it would be possible for a party to ‘game the system’ by making its own request for an adjustment at the end of the three-year period so as to foreclose for the subsequent three-year period the possibility for the other party to make a price review request in the other direction.
If a party attempts such a tactic, but then does not prosecute its price review claim (by using its claim not as a ‘sword’ for a new price but instead as a ‘shield’ against the other party seeking to change the price), then some have argued that the first price review request was abandoned and that the inactivity of the first party could breach the principles of fair dealing and of good faith, which can be found in most legal systems and are often contractual requirements. In the author’s opinion, this tactic – of using a request as shield rather than a sword – runs counter to the intention of the parties when they entered into their long-term contract and should not be permitted.
Price reviews as distinct from force majeure and economic hardship
A price review is distinct from a force majeure or economic hardship claim. To be sure, a price review claim and a force majeure or hardship claim may coexist. Nevertheless, they are different, and one common distinction between them is foreseeability. Generally, force majeure and hardship require that the trigger event be unforeseeable. By contrast, unforeseeability is generally not a requirement in a price review.
This distinction is important. Unforeseeability is more difficult to prove as it contains a higher threshold – this brings with it a more dramatic remedy. A good example is the bouleversement  provision found in Algerian long-term contracts. This provision, similar to hardship, accords the affected party the right to have the sales price adjusted to capture the event that caused the bouleversement. Such an event, however, does not need to be unforeseeable. By contrast, hardship claims under the Algerian Civil Code require unforeseeability as a precondition. But hardship under Algerian law, where proven, also allows for a more dramatic remedy: it provides the affected party the right not just to review the price but to review any term of the contract, such as the take-or-pay provision. By contrast, most price review clauses do not contain a foreseeability requirement, but they also provide that the remedies available to the affected party would be limited to the revision of the price on a prospective basis (generally, from the date of the price review notice).
The lack of a foreseeability requirement can be decisive. Some respondents have argued that the effects of a given trigger were already foreseen when the contract sales price was last set by the parties or by the arbitral tribunal and, therefore, have already been incorporated in the previous review. Or the respondent may argue that the requesting party should have requested that adjustment to include the already foreseen effects of the trigger and that, by not having done so, it waived its rights. This defence should not stand. It would disrupt the price review process, which has, as discussed below, an inherent forward-looking approach.
If the requesting party were required to include in its request the effect of a foreseeable trigger that occurs even after the review date, such a requirement would be unworkable because the specific quantitative impact of the future event is not known at the time of the request. Moreover, extending the effects of a trigger beyond the review date would render the next price review meaningless for triggers that were foreseeable. If the requesting party elects not to put forward a specific trigger that is foreseeable (but has not yet occurred) in one price review, this decision does not constitute a waiver to introduce that trigger in a subsequent price review. The contract sales price should be reviewed based on the triggers – and on the effects of those triggers – that actually occurred since the last revision to the contract sales price.
Moreover, as commentators have observed, it is not feasible to allocate a precise value against each single change, unless there is only one. The non-requesting party may argue that if a trigger claimed by the requesting party would not pass the relevant test and therefore should be disregarded, that part of the requested adjustment that is associated with the trigger should be ignored by the arbitral tribunal. Generally, however, if the application of the delta methodology has demonstrated that the contract sales price and the market value of gas has decoupled, the decoupling has occurred after all the amalgamated changes that took place in the market of reference are taken into account. It is generally sufficient to demonstrate that the delta has been caused by one significant change, because it is virtually impossible to claim that there is a cause-and-effect relationship between each and every single market event and each and every needed adjustment to the contract sales price. However, the claimant should, on the balance of probabilities, prove that the change in the gas value identified in step 3 has been caused by the claimed changes rather than for some other reasons. The change in the margin of the buyer at the beginning and at the end of the review period is not per se a change for purposes of the price review clause.
The economic value of the impact of the triggers determined by the tribunal should be considered in terms of direction and magnitude when the market test is performed, and the contract sales price should then be revised according to the market test. In other words, the first three steps will determine whether there is a relevant market change and, if so, the direction and magnitude of the required revision to the price. The tribunal should then proceed to the fourth step, which is to take the given change in the market gas value and translate it into an adjustment to the contract sales price according to the market test (i.e., that the adjusted contract sales price enables the buyer to market the gas economically and competitively).
Finally, the most important consideration is the authority of the arbitrators to set the new contract sales price. Generally, oil-linked prices are the result of a formula formed by a ‘P sub-zero’ (or P0) component and an indexation component. Arbitrators can revise both components of the formula, unless explicitly prohibited by the wording of the contract. Whether arbitrators have the authority to change the indexation from oil to hub, however, is a different question – and one addressed below.
The timing crossroads: looking backwards and looking forwards
Timing is one of the essential elements in the price review process. Despite this, a typical price review clause usually gives very little direction on how the parties and the arbitrators should deal with this important issue. In fact, the wording typically used in a price review clause refers to the time element only to make clear that a price review request can be requested at specific intervals (or a limited number of ‘wild card’ price reviews, which usually can be invoked at any time) and the effective date of the new contract sales price.
It was the parties, the practitioners and the arbitrators that developed certain terms – particularly those relating to timing – that are commonly used in the price review process, although they are not expressly mentioned in the relevant contractual provisions. These include the reference date, the review date, the review period and the new price period. These temporal terms are key.
The reference date is when the price was last set by the parties or by the arbitrators. It often corresponds to the date when the previous price review was requested or, in the event that there has been no previous price review, when the contract was signed, or deliveries of gas commenced. The reference date is also typically the start date of the review period.
The review date is generally the first date of effect of any new revised contract price. It typically corresponds to the date on which the claimant sent the price review notice that commenced the current price review. The review date is the last day of the review period.
The review period is the period between the reference date and the review date, which is often three years. In general, it is during the review period that any trigger criteria must occur. In this sense, the review period is backward-looking, whereas any new contract sales price – based on past changes that occurred during the review period – is forward-looking.
The new price period looks to the future and refers to the time from the review date to the date when a new price review will be requested. It could potentially extend until the expiry of the contract.
The correct application of these periods is the first set of crossroads reached by the arbitrators.
First, losses or excessive gains incurred by either party during the review period generally cannot be compensated in a price review; rather, losses are to be incurred by the party who has sustained them and cannot be recovered. In general, if the contract sales price on the reference date and on the review date is fully aligned with the market value of gas (i.e., the delta is zero), the contract sales price should not be changed and whatever happened during the review period becomes irrelevant. This is because, whether or not the lasting changes occurred during the review period, they did not have a positive or negative effect on the market value of gas as compared to the contract sales price measured at the reference and review dates. To this extent, the price review process is forward-looking; its purpose is to set a new contract sales price going forwards and not for the past.
Second, the review period is a backward-looking exercise to the extent that the tribunal must determine whether the events claimed to constitute the triggers have occurred and qualify as the relevant changes for adjusting the price.
Third, to assess the lasting effect of a trigger, one must consider if this is a backward-looking or a forward-looking exercise – and if a trigger can be considered as such no matter when it occurs during the review period. This issue is commonly debated in price review arbitrations. Importantly, the event that constitutes the trigger can happen at any time during the review period. The precise point during the review period is not relevant per se, but some have argued that particular attention is sometimes given to lasting changes that occurred at the end of a review period and are therefore more likely to endure into a new price period.
More complicated is the issue of determining the lasting effects of a trigger. For any event to qualify as a trigger, it must meet certain criteria, which may vary depending on the wording of the contract. Nevertheless, it is widely accepted that temporary events cannot be considered for purposes of a trigger. What is ‘temporary’ is often disputed, as this issue often is not addressed in the contract.
Some have argued that the lasting requirement means no more than the time within (and not beyond) the review period (i.e., if price reviews are permitted every three years under the contract, then the lasting requirement cannot refer to a duration of more than three years). Others have argued that this period of evaluation should be extended beyond the review date. And still others have suggested that the long-lasting effect should be extended until the review date of the following price review.
It is reasonable to assume, however, that because the price can be reset at periodic intervals (again, typically every three years), then the contract mechanics dictate that a lasting effect does not have to persist longer than the contractually mandated period (i.e., the lasting effect requirement mandates something less than three years). This is consistent with the logic of the price review exercise and its overall mechanics. However, it also appears that limiting the assessment of the lasting effect to only a snippet of the review period would not be appropriate, especially given the forward-looking nature of the new contract sales price.
The correct answer depends on the wording of the contract and the facts of the case. Some have argued that, if the price review provisions are silent on this issue, as they usually are, the assessment should be extended to a limited period beyond the review date because in arbitration there must be some flexibility regarding permissible data to allow for a reasonable inquiry into the durability of the alleged changes going forward. To this extent, the lasting effect of any change should be determined with a forward-looking approach into the new review period to assure that the new contract sales price will be aligned with the gas market values when the tribunal sets the new price.
Fourth, as explained above, the purpose of the price review is to set a new contract sales price for the future, typically effective on the review date, until the next price review date, if any. The methodology to be followed by arbitrators in dealing with these timing issues should be considered in light of the practical circumstances of the proceedings and of the fact that the arbitration usually begins well after the review date, with an award rendered by the arbitrators years after the review date, and in some cases close to the new possible date for requesting a new price review. New data, after the review date and during the proceedings, could be available for assessing the triggers and the effects of the triggers on the contract sales price and on the market value of gas.
Arbitrators are often requested to ignore or to take into consideration such post-review date data. This, too, is another inflection point in the price review
price. By improperly taking into consideration the data affecting the market value of gas or the contract sales price well after the review date, the tribunal would disrupt the risk allocation under long-term, take-or-pay contracts. The more widely held view is that some data can indeed be taken into consideration after the review date (though for a limited time) but for the sole purpose of assessing the durability of the effects of the triggers and their effect on the market value of gas or on the contract sales price during the review period.
This is the essence of the price review. There must be a specific time frame within which the parties and the tribunal determine whether the trigger criteria are satisfied and the period during which the new contract sales price will apply.
Which gas market value?
The second key element in price reviews is the market value of gas. It has a twofold scope: first, to determine whether the requesting party is entitled to an adjustment of the contract sales price; and second, to determine the amount of the adjustment.
In general, the contract sales price must be compared with the market value of the gas at the beginning and the end of the review period. This is the ‘delta methodology’.
To evaluate the market value of gas can be an extremely complex exercise and may vary depending on the wording of the price review clause. If the clause is vague in addressing this issue, its interpretation will become more controversial.
In general terms, the issue of the market value of gas requires answers from the arbitrators to the following questions: What is the market value of gas? What are the data points that should be used to assess it? At what time should this data be assessed? And where in the marketplace should this value be measured?
These questions often arise in price review arbitrations, and their resolution may well affect the ultimate outcome of the case.
In most circumstances, the value of gas is the price of gas obtained in the relevant market in arm’s-length transactions at a certain point in time. To determine the market value of gas, certain data (e.g., prices) must be considered. The type of data that should be considered by the arbitrators is one of the major battlefields in price review arbitrations.
Usually, buyers rely on their own data relating to their own sales and based on their own market segmentation to demonstrate that the contract sales price
is above the market value. Buyers might also rely on other available data, such as that published by the energy regulators of the given country.
For their part, sellers often rely on other methodologies, including statistical data (such as Eurostat) or other benchmarks derived from the available sales data of other sellers in the same or other markets and other segmentations or, in some instances, from the hub prices.
Some have characterised this approach as the ‘obtainability’ test – that is, to determine market value by what is obtainable to the buyer, as distinct from the prices the buyer actually obtains. This issue is of particular importance in price review disputes.
In the author’s opinion, real data should be preferred, provided that the data can be verified. When verified real data is available, there is no need for the arbitrators to consider statistical data, which by their very nature serve other purposes, are not complete, often do not refer to the same period and typically require the use of proxies created by extrapolating the data from the balance sheets of competitors. For the same reasons, the market data available from the hub might distort the assessment of the market value of gas because the price levels do not consider the fact that the buyer or the seller may sell or purchase the gas at the hub price plus or minus a premium.
Moreover, buyers often insist on using not only their own data but also their own market segmentation (i.e., the percentage of gas that a buyer sells to power generators, industrial plants, commercial and residential customers – all of which pay different prices). The debate focuses on the issue of whether the market value should be calculated on the basis of the segmentation of the market as a whole, or the segment of the market to which the buyer sells gas under the contract. For example, the buyer in a price review may sell a greater percentage of gas into the power generation segment than the ‘average’ buyer in the market sells into that segment. In this situation, should the tribunal weight the price in the power segment according to the market average or to the percentage specific to the buyer in the price review? The wording of most price review clauses does not address this issue. Some have argued that it could be helpful to analyse the negotiation history of the contract itself to find the solution. For example, if a buyer had sold most of its gas to thermoelectric customers and the seller was aware of it, it is reasonable to assume that when the seller was entering into the contract, it was taking the price risk related to the prices in the thermoelectric segment.
The final issue is the period for assessing the market data. In general, market data should be analysed to determine whether changes occurring during the review period caused the contract sales price to disconnect from the gas market as of the review date. But how should the tribunal calculate the market price? In markets where gas is contracted on the basis of a thermal year, agreements for the sale of gas are signed in advance of the commencement of that thermal year – sometimes many months in advance. In Italy, for example, the negotiation period for gas contracts for the forthcoming thermal year is called the ‘commercial campaign’. In markets selling gas on a thermal year basis, it is important for arbitrators to consider the average price agreed during the commercial campaign. This is the reason why it may be risky to request a price review too far in advance of the beginning of the thermal year.
Another debate that may arise in the proceedings is whether the data should be examined as of the date when the gas is sold (the date when a willing buyer and a willing seller agree the price, also called the fair value approach) or the date when the same gas is later delivered to the customers. The fair market value has been held to be an acceptable methodology to determine the market value of gas using real data in price review arbitrations.
Finally, the gas value is fundamental not only to verify whether the triggers have been satisfied, but also to assess the direction and general magnitude of the tribunal’s application of the final step of the price review analysis: the market test. That is, if the gas value has decreased during the review period, the contract sales price should be decreased in the next step of the analysis: applying the market test and setting the new price.
The market test: setting the new price
Having found that there are lasting changed market conditions and that the changed market conditions are not reflected in the contract sales price as of the review date (i.e., the first three steps), the arbitrators then have to quantify the level of the price adjustment (i.e., the fourth step). At that point in the analysis, part of the outcome has already been decided. At this stage, the arbitrators are convinced that there is a delta between the contract sales price and the market value of gas at the end of the review period that needs to be addressed, having already established the level of the delta in step three.
The tribunal must then run the market test by taking the economic value of the change in the value of gas and assess whether it meets the market test set forth in the contract for revising the contract sales price. The market test is
expressly provided for in many contracts by language such as ‘the new price should enable the buyer to economically market the gas’. The words may vary – such as ‘competitively market the gas’ or ‘providing the buyer a reasonable margin’ – but the concept is generally the same. In some contracts, the wording could even be stronger, using the ‘in any case’ clause.
This step in the analysis is perhaps the most important inflection point in the case. A proper analysis of this part of the analytic framework requires consideration of the following factors.
First, it is not correct to say that the market test applies only to claims filed by buyers for a price reduction. Rather, this test also applies to cases in which the seller has requested a price increase.
Second, the market test, when correctly applied, means that the revised contract sales price should, in any case, allow the buyer to sell the gas at a profit as of the review date, assuming prudent operations.
Third, under the market test, the market value of gas into the next review period is not relevant per se, as this will be taken into consideration for the following price review, except in the situations explained above, when the arbitral tribunal has decided, for various reasons, to consider data beyond the review date.
After these preliminary considerations, the ultimate question is whether the market test is the controlling factor in price reviews. Put simply: if the other provisions of the price review clause would otherwise lead the arbitrators to do so, can the arbitrators fix a new price that would leave the buyer without a reasonable margin or even in a loss situation notwithstanding the market test (and even more so with the in any case provision)? In principle, the answer is no: the market test generally requires that, regardless of the other provisions in the price review clause, the arbitral tribunal cannot revise the contract sales price in a manner that would put the buyer in a loss-making position. Any other result would be commercially unreasonable.
There are at least three approaches that could be applied to determine an appropriate margin for the buyer:
- The margin restoration approach would have the effect of restoring the margin granted to the buyer by the seller when entering into the contract. It would refer to the buyer’s market prices and market segmentation.
- The reasonable margin approach would calculate the margin by taking into consideration a number of factors, such as the net profit element to be calculated on the basis of an average net return for these types of transactions using the buyer’s prices and market segmentation, the costs for marketing the gas, and the logistics and delivery costs, and by assessing the risk undertaken by the buyer under the contract.
- The equitable margin approach may be feasible – particularly when, in the contract sales price formula, there is a proviso for a price floor. In this situation, the difference between the floor price and the contract sales price can be assumed to be the margin for the seller. Having determined the margin for the seller, the arbitrators could be in a position to determine an equitable margin for the buyer.
As discussed above, the result of the market test should enable the buyer to market the gas with a gross margin (profit). One of the most debated issues is whether the gross margin should be calculated on the buyer’s prices and market segmentation or on that of a hypothetical buyer. As shown above, the gross margin in most cases should be calculated on the buyer’s market prices and segmentation. This solution is the most logical application of the risk allocation and contractual balance principles embedded in the contract. Indeed, by assuming the price risk, the seller takes the risk of ensuring a price that, as of the review date, will enable the buyer to obtain a margin in its own market – a risk the seller accepted when entering into the contract with the buyer.
In recent times, due to the upheaval of gas market values and the increase of the oil prices (even if more moderate), the margin of both sellers and buyers has increased. This situation raises the question of whether tribunals, when setting a new price, should seek to maintain the balance of the contract by taking into consideration not only the change in the margins of the buyer over the review period, but also that of the seller. In the latter situation, a tribunal could employ a delta-of-delta methodology to determine changes in the sellers’ margins as well. In carrying out this exercise, a tribunal should have access to the economics of the seller (mainly the costs incurred to produce and sell the gas to the buyer). Sellers, however, have been reluctant to provide such information to tribunals in the past. This issue may arise in proceedings related to a price revision request encompassing the year 2021 and beyond.
In summary, the market test represents the final check on all decisions made by the arbitrators in the proceedings. This suggests that arbitrators should not decide a fortiori the consequences of its analysis but, rather, consider and apply the market test at the very end of the process as the point of convergence of all decisions made.
Changing the indexation formula
Perhaps the most important recent change in the natural gas industry in Europe has been the change from oil indexation to hub indexation. As explained above, historically parties linked their gas contract sales prices to competing fuels because of the absence of liquid gas hub prices. Recently, however, market liberalisation and the subsequent maturation of several gas hubs in Europe have made oil-linked contracts a fading feature of the Europe gas industry. As a result, parties are now increasingly incorporating gas hub indexation in their pricing formulas instead of oil indexation. This development has been recognised in the industry and by regulatory bodies. It is also reflected in the new era of hub-linked, long-term gas sales and purchase contracts executed in recent years in which the price review clauses are not as relevant as they were in the oil-linked contracts.
This development has implications for the arbitral tribunals that have to decide on the proper methodology to change the contract sales price. In particular, tribunals may decide whether to change the indexation component of the price formula or the P0 component. If a party has requested to change the indexation component, the arbitrators are brought to a new crossroads in the price review analysis. It is not an easy task for the arbitrators to deliberate on whether they should change oil indexation in a price formula to hub indexation. In this regard, arbitrators may consider seeking the assistance of the parties when considering this thorny issue.
As explained above, it is widely accepted in the gas industry that a price review is based on a four-step process, whereby the failure of the claimant to satisfy any of the steps brings the case to an end. Often, the most hotly debated step is the last one, when the arbitrators and the parties have to run the market test to determine the manner in which to revise the contract sales price. This is the step at which the tribunal will determine how to revise the contract sales price to take into account the significant changes, but always providing that the buyer is able to sell the gas in the market economically and competitively (i.e., at a reasonable margin).
A 100 per cent change in the indexation component of a gas price formula requires deletion of the oil basket indexation, the introduction of hub indexation and potentially (but not necessarily) deletion of the P0 element:
and replacing it as follows:
Contract sales price = TTF – D
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; or
- ‘weekend’, if the concerned day is not a London business day.
D is the x.y euro/MWh converted monthly from euro to US dollar
The gas hub reference generally used in Europe is the title transfer facility (TTF) in the Netherlands, although in some countries the increasing liquidity of the gas markets has caused parties to incorporate into their price formulas country-specific hub prices (for example, the punto di scambio virtuale (PSV) in Italy).
While some sellers have argued that referring to a hypothetical buyer’s market prices and market mix should be considered in the context of hub indexation, the buyer’s actual sales and market mix still remain paramount. As explained above, when the tribunal runs the market test, it must ensure that the contract sales price always entitles the buyer to obtain a reasonable margin on its own sales.
The final question is how the tribunal should determine the revised contract sales price. Tribunals have taken a variety of approaches. Without commenting on the validity of them, two are of particular note, given the recent move to hub indexation.
The first is to determine a sort of ‘fixed’ price by taking the hub reference price and adjusting it by adding or deducting a value expressed in the currency of the contract, and eliminating the P0 component. The final result should be a contract sales price that would allow the buyer to sell the gas economically in the relevant market, taking into consideration its own market segmentation.
While some sellers have argued that the end result would be a major change in the structure of the gas sales and purchase contract (because, they argue, it would embed a potential guaranteed margin to the buyer), this methodology is frequently used today for the sale of gas into the end markets, and it is also frequently used in the gas industry when sellers and buyers agree to revise the contract sales price by changing indexation or when they enter into a new sale and purchase contract. Indeed, it could be said that this is the new trend in the industry.
The second methodology is to change the indexation from oil to hub prices but to maintain the P0 element. In this situation, the tribunal should change the P0 element to arrive at the result it has in mind. The P0 element relates to the contract sales price level, whereas the indexation formula relates to the movement of the contract sales price. Changing only the indexation formula to the hub prices would have the effect of locking the contract sales price into a fixed relationship with the hub prices but would not necessarily enable the seller to obtain the margin it deserves under the contract. This would be the same as pretending that hedging the oil indexation would be the solution to every price revision and to the fluctuation of the relationship between the contract sales price and market prices. Obviously, that is not the case. This second methodology relates to the situation where the parties or the tribunal arrive at the decision only to partially change the indexation formula from oil-linked products to hub prices. In these cases, the P0 component must be retained.
In summary, tribunals thus face a difficult task in determining if and how to change the indexation in a gas pricing formula. Where possible, this task should be done in close consultation with the parties and their experts, which is critically important in a price review. The tribunal may also consider appointing its own expert to assist with this difficult task. With an appropriate change to hub-priced indexation, the contract price should automatically adjust, such that it could be defined as an automatic adaptation clause.
In any given price review, either party may request the switch from oil indexation to hub indexation, unless the contract prohibits such a change. If the contract provides for the right of either party to request a review of the contract sales price, it can be assumed that the tribunal has the authority to change or eliminate the P0 or change the indexation formula. Some contracts, however, expressly limit the arbitrators’ review to the P0 component. Under those contracts, the authority of the tribunal is limited to change only that element of the formula.
In Atlantic LNG v. Gas Natural, the tribunal went even further. It decided to change the indexation formula even though neither party had requested it (but the end result represented a significant victory for Gas Natural). Although some have argued that this approach has raised questions of ultra petita, others disagree. The other factors that should be considered in determining the authority of the tribunal to change the indexation are the governing laws of the contract, the lex arbitri and the terms of reference agreed by the parties.
The switch to 100 per cent gas hub indexation has the effect of reducing the importance of the traditional price review clause. Because hub indexation generally reacts automatically in real time to changes in the price of gas sold at the hub – rather than through the proxy of oil and oil products – the notion that the oil-indexed price will decouple from gas prices, and thus require a revision to the contract price in a price review, is diminished. Nevertheless, there may still be a need for a price review clause for situations where, for example, the gas is sold in one market (e.g., Italy) but its price is indexed to a hub in a different geographical location (e.g., the TFF in the Netherlands). Some have argued that, if the local hub starts sending the price signal to the market where the gas is delivered rather than the distant hub to which the price of the gas is indexed, the price review clause could prove to be an important way to change the indexation to the appropriate hub.
Finally, parties may attempt to seek a price review if the margins of wholesalers change during the review period. Assuming that the formula is hub price minus a certain value, if that value becomes out of sync with the market, the question is whether a price review could be requested to change such a deduction from the hub price and align the contract sales price to the market value – in other words, whether the possibility of the buyer to market the gas economically would be assessed against the general trend of the other market players.
Review of gas price formulas with hub indexation
As has been explained, many long-term gas and LNG contracts are transitioning from oil indexation to hub indexation. The transition process has involved both the ‘old’ existing contracts, made through agreement of the parties or arbitral awards, and the ‘new’ contracts entered into more recently, in which the indexation of the contract sales price to oil prices has been replaced by indexation to hub prices, namely to TTF in the Netherlands and to Henry Hub in the United States. As commentators have recognised, these more recent long-term contracts generally do not include the traditional price review clause.
Attention now turns to how arbitral tribunals will treat price review clauses in ‘old’ contracts that are now hub-indexed. The first decision that those arbitral tribunals must face in proceedings regarding a contract price 100 per cent indexed to hub prices, where the price review clause is still incorporated in the contract, is whether the widely recognised four-step procedure, applicable to previous price reviews, should still be followed. The arbitrators are likely to be asked to adapt the ‘old’ price review formula agreed at the time of oil-linked prices to the new reality of hub-linked prices.
It has been argued that in a price review under a contract with 100 per cent hub indexation, there is no need to run the entire four-step process: rather, according to these sources, it would suffice to move directly to the third and fourth steps. The arguments in favour of such an approach are that, where the formula is hub-indexed, the existence of market changes during the review period (step one) and their long-lasting nature (step two) need not be considered. Instead, these sources argue that the changes in the relationship between the market prices and the contract sales price (step three) would represent per se a change that would trigger the gas price review without the need for any further evidence.
This approach, however, would mark a significant departure from the traditional price review process under take-or-pay contracts. It would run counter to the language of the old contracts, which requires the satisfaction of each of the four steps of analysis. It would also run counter to the reasoning behind the change in indexation, which was introduced to establish a new way of price formation – not to set a new standard for evaluating whether the formula should be changed as market conditions evolve.
For that reason, the first two steps of this process (i.e., to determine whether durable, significant changes have occurred during the review period) generally should remain the same, as it should not be affected by the price formula indexation of the contract. The burden of proof should always fall on the claimant to demonstrate that a change to the market conditions has occurred. Hence, this first step should, in practice, remain unchanged. The golden rule of price reviews is: no change, no revision. There is no reason to modify that rule because of a change in indexation.
As explained above, the third step of the price review analysis is to determine whether such changes are not reflected in the contract sales price, and the fourth step is to revise the contract sales price in a manner that allows the buyer to economically market the gas. Both these steps take place as of the review date. These two steps generally are not rendered obsolete by the fact that hub indexation has replaced oil indexation in the contract price formula. They are necessary to determine the need to revise the contract price (step three requires 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) and to ensure that the revised contract sales price is set at an appropriate level (step four requires the revision to enable the buyer to earn a reasonable margin), regardless of whether the contract price is oil-indexed or hub-indexed.
In theory, the result of the delta-of-delta methodology of a contract price indexed to the hub prices generally will be zero. Indeed, the margin of the buyer will, in principle, remain the same if the formula provides for a hub price minus a certain value. For instance, if the formula at the beginning of the review period is TTF-2 €/c, then at the end of that period the margin of the buyer should still be €/c 2 per scm. If the formula were TTF or TTF plus a value, the same would follow, with the delta-of-delta result being equal to zero.
In such a situation, the question would be whether the request of a price review should then be dismissed, or if the arbitrators should find a different approach that is an alternative to the four-step process described above. In theory, one alternative approach could be based on the principle of a guaranteed margin in favour of the buyer. This principle is particularly relevant to – and, indeed, embedded within – the new generation of contracts in which the structure is that of a take-and-pay contract rather than that of a take-or-pay. In that situation, the tribunal may be asked to take into consideration changes in the buyer’s structure of marketing costs and the risks relating to the contract.
Traditionally, in cases involving contracts with full oil indexation, arbitral tribunals have concluded that a guaranteed margin (i.e., to last until the next review period) generally is not justified. Matters may be different, however, in hub-indexed contracts. Arbitral tribunals may be asked to decide whether the value deducted or added to the hub price is still reflecting the market conditions at the time it was agreed by the parties. In those circumstances, the tribunal may be asked to decide how the value should be ‘updated’. In essence, the arbitrators will have to decide the methodology that should be applied to run the tests otherwise required by steps three and four. This will present a new crossroads for arbitrators in price review arbitrations. It may require the tribunal to adopt a new methodology that, as yet, is an unknown.
One further attempt to resolve the dilemma concerning the use of an old price review clause to reopen a hub-indexed price is to argue that the margins of 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 players at the beginning of the review 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 that would take into 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 unknown territory. Nevertheless, the result may be that the arbitral tribunal would limit its analysis of the price review process to the market test (i.e., step four).
This would represent a deviation from the language of the price review clause in old contracts, which would inevitably result in a new interpretation of the price review clause for four reasons. First, the arbitrators would not follow the prevailing interpretation of the criteria in typical price review clauses, ignoring the requirement of a lasting, significant market change. Arbitrators may struggle to find a different interpretation than that found in the old price review clauses.
Second, the risk allocation agreed between the parties to the contract may be altered. With oil indexation, the buyer takes the volume risk through the take-or-pay provisions and the seller takes the price through the price review clause such that, typically every three years, the contract price can be revised to ensure, among other things, that the buyer earns a reasonable margin when selling on the gas purchased under the contract. In a contract where the price is indexed to the hub prices, by contrast, the buyer’s risk has not changed, while the seller’s price risk is not in between price reviews, but rather monthly as the indexation to the hub is calculated based on the average month-ahead price 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 presented by a take-or-pay contract whereby the parties have agreed to change the indexation formula only partially; for instance, to split the indexation into oil and hub. This is the case for many existing contracts in Europe. It has been argued that this situation should be analysed under the traditional four-step process described above. It remains to be seen how tribunals will address this hybrid situation.
Consecutive price review requests
Traditionally, long-term natural gas contracts have a term of at least 20 years. As such, it is entirely possible that a contract sale price in a contract has been subject to multiple requests for revision and therefore to multiple proceedings and arbitral awards. This is one of the legal issues that is often debated in a price review arbitration: what role should a previous award play in a new price review?
The doctrine of issue estoppel – or collateral estoppel, as it is known in the United States – has an important role in answering this question. This doctrine should not be confused with the principle of ne bis in idem or action estoppel (the strict form of res judicata), whereby a party is prevented from bringing the same action against the same party twice. With regard to gas price reviews, the contracts provide for multiple and potentially consecutive proceedings between the same parties, under the same contract and on the same subject matter – revision of the contract sales price. The issue is not whether the dispositive motion of an earlier award is binding in a later arbitration; rather, the issue is whether the first tribunal’s interpretation of the contract is binding in the second proceeding.
Resolution of this question may depend on the law that governs the issue. In many jurisdictions, the doctrine is effectively the same but known by different terminology: in the United States, collateral estoppel; in the United Kingdom, issue estoppel; and in some parts of Europe, res judicata.
Applying these principles, it is necessary to run an analysis on the boundaries of the application of the doctrine, which is to say which parts of an award are binding on future arbitral tribunals. Indeed, this principle constitutes, when and to the extent applicable, a limit on the arbitrators’ authority in a subsequent proceeding.
The answer is typically found in the applicable law. The first question is whether issue estoppel should be governed by the lex arbitri, the substantive law governing the contract or international principles.
As described above, the issue estoppel principle is widely recognised in many jurisdictions and applies to the proceedings between the same parties, on the same contract and involving the same issues. It also applies to both court and arbitral proceedings. In the United Kingdom, res judicata includes both issue estoppel and action estoppel. The principal difference is that cause of action estoppel applies where the cause of action in the later proceedings is identical to that in the earlier proceedings, whereas in issue estoppel the estoppel applies to a wider category of issues that form a necessary ingredient in a cause of action. An issue forms a necessary ingredient of the previous decision if it is fundamental or essential to the decision. This means that issue estoppel applies not only to the dispositive part of an award, but also to the decisions made by the tribunal that were necessary and fundamental to arrive at that conclusion.
In the United States, the doctrine is known as collateral estoppel (e.g., in New York courts) and bars further litigation of specific issues that were determined in an earlier case between the same parties, even when a new and different claim is being asserted in a subsequent proceeding. The application of collateral estoppel requires that the issue in the prior proceedings was identical; that the issue was actually litigated and decided; that there was a full and fair opportunity to litigate in the prior proceedings; and that the issue previously litigated was necessary to support a valid and final judgment on the merits.
The application of this principle in continental Europe is more nuanced. In Italy, for example, it is expressly regulated by Section 2909 of the Civil Code, which sets out the principle according to which a final judgment prevents the matter forming the essential basis of a previous decision from being called into question in subsequent proceedings. Case law and Italian scholars have confirmed that res judicata covers not only the dispositive part of the award, but also includes the necessary and logical findings underpinning the first tribunal’s decision.
In Switzerland and in Germany, the res judicata principle applies to the operative part of the award only, following the principle of ne bis in idem denying any effect to the doctrine of issue or collateral estoppel.
It has been argued that the tribunal ‘should remain at liberty to depart from findings of fact and law if they are no longer adapted to the economic context’. While it is true that the economic findings of a first tribunal should not be binding in a subsequent proceeding that involves different economics, the first tribunal’s interpretation of the meaning of the contractual language should indeed be binding on a subsequent tribunal.
In his well-known treatise on international arbitration, Gary Born points to international standards derived from the New York Convention as applicable in determining preclusive effects in international commercial arbitration. In that discussion, he underscores the obligation of an arbitral tribunal to apply preclusion principles when there has been a prior judgment or award. He identifies a growing trend on the part of arbitral tribunals to formulate sui generis rules of international preclusion to be applied to a prior arbitral award, citing and quoting from the final award in ICC Case No. 3267:
[T]he binding effect of its first award is not limited to the contents of the order thereof adjudicating or dismissing certain claims, but . . . it extends to the legal reasons that were necessary for such order, i.e., to the ratio decidendi of such award. Irrespective from the academic views that may be entertained on the extent of the principle of res judicata on the reasons of a decision, it would be unfair to both parties to depart in a final award from the views held in the previous award, to the extent they were necessary for the disposition of certain issues
Accordingly, in consecutive gas price review proceedings, res judicata in the form of collateral or issue estoppel represents an important decision for the arbitrators. Indeed, the author’s experience in a recent major price review arbitration involved important matters of issue estoppel, which proved material to the outcome of the case.
After two decades of gas price reviews, the contractual framework of long-term gas and LNG sales and purchase contracts in Europe are evolving from the system created more than 50 years ago when there was no comparable commodity to gas other than oil. The arbitral awards rendered during the past decade have demonstrated that historical oil indexation is giving way to gas hub indexation.
The drafters of new, long-term gas sales and purchase contracts have thus recognised the need to implement a different contractual framework by introducing a price formula that is fully or partially indexed to gas hub prices. In some instances, these drafters have omitted price review and flexibility clauses. In so doing, they have changed the nature of these contracts from take-or-pay to take-and-pay by changing the price formation mechanism.
Nevertheless, many take-or-pay contracts will still be subject to gas price reviews, particularly those that remain unchanged and unaffected by the ongoing transition process. It is for those contracts that the price review process will remain the same as in the past. For those take-or-pay contracts in which the parties have agreed to introduce a total or partial indexation to hub prices, the situation will be more complex. Indeed, arbitrators will have to cope with new issues and problems, the most important of which will surround the methodology to be followed when reviewing the contract price.
Ultimately, this potential new approach is difficult to predict. The current landscape is taking arbitrators into unknown territories. For the time being, however, with the increasing transition from oil indexation to hub indexation in the price formation mechanism, price review disputes seem to have calmed in continental Europe.
 Marco Lorefice is a senior lawyer at Edison SpA.
 Marco Lorefice, ‘Gas Price Review Arbitrations’ The Guide to Energy Arbitrations (4th edition, ed J W Rowley, Global Arbitration Review, 2020) at p.193.
 Ana Stanič> and Graham Weale, ‘Changes in the European Gas Market and Price Review Arbitrations’, p. 325, Journal of Energy and Natural Resources Law, Vol. 25, No. 3 (2007); Anthony J Melling, ‘Natural Gas Pricing and its Future: Europe as the Battleground’ (October 2010); Morten Frisch, ‘Current European Gas Pricing Problems: Solutions Based on Price Review and Price Re-Opener Provisions’, p. 17, International Energy Law and Policy Research Paper Series, Working Research Paper Series No. 2010/03, Centre for Energy, Petroleum and Mineral Law and 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?’, p. 16, Oxford Institute for Energy Studies (September 2009).
 George von Mehren, Gas Price Arbitrations: A Practical Handbook (1st edition, ed M Levy, Global Law and Business, 2014) at p. 91.
 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, p. 35.
 For a more detailed analysis, see Professor J Stern, Gas Price Arbitrations: A Practical Handbook (1st edition, ed M Levy, Global Law and Business, 2014), at p. 5; Anthony J Melling, ‘Natural Gas Pricing and its Future: Europe as the Battleground’ (October 2010).
 Prof J Stern (footnote 6), at 6.
 R Power, ‘Gas price review: is arbitration the problem?’, Global Arbitration Review (6 March 2014), with reference to price review cases.
 M Levy, Gas Price Arbitrations: A Practical Handbook (2nd edition, eds J Freeman, M Levy, Global Law and Business, 2020); A Ason, ‘Price reviews and arbitrations in Asian LNG Markets’, OIES Paper: NG 144, April 2019.
 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, at 34.
 ibid., at 32 for different price review clause models.
 Gas Natural Aprovisionamientos, SDG, SA v. Atlantic LNG Company of Trinidad and Tobago (2008 WL 4344525 (SDNY).
Eastern European Engineering v. Vijay Construction  EWHC 2713 (comm) .
 id at 80.
Sierra Leone v. SL Mining Ltd  EWHC 286 (comm) [8,38].
 Paulsson, in Jurisdiction and Admissibility in Global Reflections On International Law, Commerce and Dispute Resolution, ICC Publishing, 2005 at 616, stating also that ‘once it is established that the parties have consented to the jurisdiction of a particular tribunal, there is a powerful policy reason . . . to recognise its authority to dispose conclusively of other threshold issues. Those are matters of admissibility, alleged impediments to consideration of the merits of the dispute which do not put into question the investiture of the tribunal as such.’
 G Born in International Commercial Arbitration (3rd ed 2021) chapter 5 at 110 ff where he states that : ‘In interpreting the parties’ arbitration agreement, the better approach is to presume, absent contrary evidence, that pre-arbitration procedural requirements are not “jurisdictional”. As a consequence, in most legal systems, these requirements would presumptively be both capable of resolution by the arbitrators and required to be submitted to the arbitrators (as opposed to a national court) for their initial decision. Similarly, the arbitral tribunal’s resolution of such issues would generally be subject to only minimal judicial review in subsequent annulment or recognition proceedings. The rationale for this presumption is that requirements for cooling off, negotiation or mediation inherently involve aspects of the arbitral procedure, often requiring interpretation and application of institutional arbitration rules or procedural provisions of the arbitration agreement. Equally important, the remedies for breach of these requirements necessarily involve procedural issues concerning the timing and conduct of the arbitration. In both cases, these issues are best suited for resolution by arbitral tribunal, subject to minimal judicial review, like other procedural decisions. Similarly, parties can be assumed to desire a single, centralized forum (a ‘one-stop shop’) for resolution of their disputes, particularly those disputes regarding the procedural aspects of their dispute resolution mechanism . . . The more objective, efficient and fair result, which the parties should be regarded as having presumptively intended, is for a single, neutral arbitral tribunal to resolve all questions regarding the procedural requirements and conduct of the parties’ dispute resolution mechanism.’
 Article 30 of the English Arbitration Act states that: ‘Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to:
(a) whether there is a valid arbitration agreement;
(b) whether the tribunal is properly constituted; and
(c) what matters have been submitted to arbitration in accordance with the
 M Polkinghorne, Gas Price Arbitrations: A Practical Handbook (1st edition, ed M Levy, Global Law and Business, 2014), at 63.
 A standard bouleversement clause provides that: ‘In the event that economic conditions and/or the conditions of the energy market and the natural gas market that served as the basis for the definition of the economics of the present contract were to significantly change [in the original French, ‘bouleversement’] to the point that they cause hardship to one of the parties and such change cannot be considered temporary in nature, then that party can request the other party to revise the price.’
 See Algerian Civil Code, Article 107.
 M Levy, Gas Price Arbitrations: A Practical Handbook (1st edition, ed M Levy, Global Law and Business, 2014), at p. 16.
 There are contracts that postpone the effective date of the new price to the date of the notification of the request, but only for a short period, e.g., 30 days to deal with specific seasonality issues.
 M Leijten and M de Vries Lentsch, Gas Price Arbitrations: A Practical Handbook (1st edition, ed M Levy, Global Law and Business, 2014), at p. 42.
 According to the Italian electricity, gas and water regulator (AEEGSI), approximately 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’, 31 March 2016, at p. 126.
 The gas to be imported into Italy from Azerbaijan through the Tap pipeline has been negotiated at hub prices: see Il sole 24ore, ‘Gas azero a prezzi sganciati dal petrolio’, 11 April 2014.
 Gas Natural Aprovisionamientos, SDG, SA v. Atlantic LNG Company of Trinidad and Tobago (2008 WL 4344525 (SDNY).
 Stephen P Anway and George von Mehren, ‘Evolution of Natural Gas Price Review Arbitrations’, The Guide to Energy Arbitrations (3rd ed, Global Arbitration Review), p. 207.
 The pricing point for natural gas contracts futures traded on the New York Mercantile Exchange and the over-the-counter swaps traded on Intercontinental Exchange.
 Dr V Nemov, ‘Gas Hub and Oil-indexed 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; Luca Franza, ‘Long-Term Gas Import Contracts in Europe: The Evolution in Pricing Mechanisms’, Clingendael International Energy Programme, CIEP Paper 2014/08; G Cervigni, ‘Oil indexation versus hub based gas pricing’, Regional Centre for Energy Policy Research, National Conference, Visegrád, 8–9 March 2018.
 See also Regulation (EC) No. 44/2001, Sections 32 and 33.
 In the same case Lord Keith of Kinkel defined issue estoppel in the following terms:
‘Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to re-open that issue . . . . Issue estoppel, too, has been extended to cover not only the case where a particular point has been raised and specifically determined in the earlier proceedings, but also that where in the subsequent proceedings it is sought to raise a point which might have been but was not raised in the earlier [proceedings]’. See also Penn-Texas Corporation v. Murat Anstalt (No. 2)  2 QB 647, 660; Mills v. Cooper  2 QB 459, 468; and Re State of Norway Application (No. 2)  1 AC 723, 743.
 See also Ryan v. New York Telephone Co, 62 N.Y.2d 494, 500 (1984) (‘collateral estoppel allows “the determination of an issue of fact or law raised in a subsequent action by reference to a previous judgment on a different cause of action in which the same issues was necessarily raised and decided” . . . What is controlling is the identity of the issue which has necessarily been decided in the prior action or proceeding. Of course, the issue must have been material to the first action or proceeding and essential to the decision rendered therein’); the Restatement (Second) of Judgments, § 27: ‘When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or different claim.’
 Italian Civil Code, Section 2909: ‘Findings made in judgments that have acquired the force of res judicata shall be binding in all respects on the parties, their lawful successors or assignees’.
 ‘Where two sets of proceedings between the same parties are concerned with the same legal relationship, and one of those sets of proceedings has culminated in a judgment that has acquired the force of res judicata, the findings thus made concerning that [omissis] resolution of points of fact or of law on a fundamental issue common to both cases – and thus constituting the logical premise underpinning the decision in the operative part – preclude that same issue of law, now settled, from being re-examined’, Court of Cassation, Decision No. 5478, 5 March 2013; Court of Cassation, Decision No. 11660, 11 July 2012 stated that ‘concerning legal relations, the duration and periodic obligations that [could eventually] constitute the contents . . . the court future . . . the authority of the judgment inhibits the re-examination of and the drawing of conclusions from issues that would tend towards a new decision on issues already settled by final measure, the effectiveness of such measure remaining valid also after its pronouncement’. See also Luca Franza, ‘Long-Term Gas Import Contracts in Europe: The Evolution in Pricing Mechanisms’, Clingendael International Energy Programme, CIEP Paper 2014/08, at p. 11.
Satta, in Enc Dir, I, Milan 1958, pp. 244 to 245; Montesano, in Riv Dir Proc, 1951, I, pp. 337 to 338; Proto Pisani,Lezioni di Dir Proc Civ, Napoli (2006), p. 69; Luiso, Dir Proc Civ, I, Milan (2013), p. 167; Consolo, in Riv Trim Dir Proc Civ (1991), pp. 594–596.
 See BGE 128 III 191 and BGE 140 III 278 (Swiss Federal Court).
 G Born, International Commercial Arbitration (2nd ed, Kluwer Law International. 2014), §27.02 at pp. 3773–3777.
 ICC Case No. 3267, XII Y.B. Comm. Arb. 87, 89 (1987).
 id. at 3776 and footnote 239.
 German Code of Civil Procedure, Section 322 provides that only the operative part of the award has the effect of res judicata (‘Urteilstenor’).