International Gas Contracts

This video is a summary of the study “International Gas Contracts” produced by the Oxford Institute for Energy Studies (OIES) and published by the Naturgy Foundation.

Natural gas is a key energy source for the world in general, and for Europe in particular. And it is set to remain so during the energy transition, while evolving through its own decarbonization process. The gas market has a distinctly global character and in recent times has had to adapt to various circumstances, such as the COVID-19 pandemic or Russia’s invasion of Ukraine. The Russian supply cut-off has significantly affected natural gas markets, and to some extent the way contracts are handled. In this context, the Naturgy Foundation has released a study that explains how international gas contracts work, prepared by the Oxford Institute for Energy Studies.

Spot contracts and short-term contracts are used mainly as demand adjustment mechanisms. Thus, base supply is traded in long-term contracts, often with durations of 20 or 30 years, known as GSAs for pipeline trading or LNG SPAs for liquefied natural gas. There is no standard model for these types of contracts, which are also highly confidential. The price is usually the most complex clause to agree on, because there is no single international mechanism to determine it. Normally, formulas are used with a fixed part and another linked to some index or to the price of oil.

This pricing mechanism diversity has led to an increasing number of hedges being contracted against market volatility, which affects the costs that buyers and sellers have to face. Other key elements are duration, which must be sufficient to ensure that investments are amortized. Or volume, where the priority is for the seller. These contracts also specify the transportation and unloading chain, the quality that the gas must have, or the laws under which the agreement will be governed.

This type of contract is based on sufficiently long terms to undertake the large investments associated with the gas value chain. But they also incorporate clauses that can respond to large variations in the markets. Thus, the main review mechanism is usually focused on price, detailing what circumstances must be met to start this process, and what tools will be used if the parties do not reach an agreement.

One of the biggest demands from buyers to sellers is that they incorporate more flexibility with periodic price review clauses; the possibility to change delivery points if it is necessary to redistribute supply; and the cancellation of some charges that relax take-or-pay contract obligations.

In addition, the requirements associated with decarbonization are gaining ground in these contracts and the industry is expected to make great strides towards achieving the carbon neutral emissions target.

Know more: https://www.fundacionnaturgy.org