Track 5 of 7
Markets, contracts and pricing
How cargoes are actually bought and sold: long-term contracts and their price formulas, the spot benchmarks, destination clauses, and what has to be true before a project reaches a final investment decision.
LNG was for decades a business of twenty-year contracts between one seller and one buyer, priced against crude oil because there was no gas price to reference and the competing fuel was oil. Much of that structure survives, which is why a cargo delivered tomorrow may be priced off a formula written before the buyer’s current staff were hired.
Alongside it a spot market has grown that now prices a large minority of trade against gas hubs directly. The two systems coexist awkwardly, and the gap between them is where a great deal of the industry’s money is made and lost.
This track explains the contract vocabulary, the price formulas and the financing logic that decides which of the hundreds of proposed projects in the tracker will ever be built.
8 modules
All written.
- 01How LNG is actually bought: SPAs, tenders and spot
LNG is bought and sold through long-term sale and purchase agreements negotiated bilaterally, medium-term supply secured by competitive tender, and single cargoes traded on the spot market at a price agreed close to delivery.
- 02Oil indexation, slopes and the S-curve
Oil indexation prices LNG as a formula tied to a crude oil marker, typically a percentage slope applied to the oil price plus a constant, with an S-curve variant flattening the formula's response at extreme prices.
- 03Hub pricing: JKM, TTF and Henry Hub
JKM, TTF and Henry Hub are gas price benchmarks for north-east Asia, north-west Europe and the United States respectively, each reflecting a distinct regional supply and demand balance rather than a single global LNG price.
- 04Destination clauses and cargo diversion
A destination clause is a contract term restricting where a purchased LNG cargo may be resold or delivered, historically used by sellers to prevent buyers reselling contracted gas into markets the seller served directly.
- 05Tolling, offtake and how projects are financed
LNG project financing depends on offtake agreements committing buyers to future volumes before construction, structured either as traditional sale contracts where the seller owns and prices the gas, or as tolling agreements where the customer owns the gas and pays only a processing fee.
- 06Take-or-pay and the shape of the obligation
Take-or-pay is a contract term obliging the buyer to pay for a specified minimum volume of LNG regardless of whether it actually takes delivery of that volume, giving the seller revenue certainty independent of the buyer's actual demand.
- 07Arbitrage: when a cargo changes ocean
LNG arbitrage is the redirection of a cargo from one regional market to another to capture a price difference, executed only when the destination's netback value exceeds the origin's by more than the cost of shipping there.
- 08Reading a final investment decision
A final investment decision is the point at which a project's owners commit the capital and sign the construction contracts to build it, converting a proposal into a funded commitment with binding obligations behind it.
Vocabulary for this track
20 terms, defined in full in the glossary.