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Arbitration and Gas Pricing/LNG Disputes

George M. von Mehren, International Energy and Minerals Arbitration (2013)

PROCEDURAL CONDITIONS PRECEDENT TO PRICE REVIEW ARBITRATION

In my presentation to the Rocky Mountain Mineral Law Foundation Special Institute on International Energy and Minerals Arbitration, I will address the substantive issues in price review arbitration under long-term gas and LNG contracts. Because I will not have time to address issues dealing with what may be characterized as procedural conditions precedent to price review arbitration, I will discuss them briefly in this supplemental paper.

By way of background, price review provisions operate to preserve the long-term commercial relationship between the parties. They are found in supply contracts that often last for fifteen to thirty years and contain take-or-pay provisions requiring the buyer to pay for a substantial quantity of gas, whether or not the buyer takes shipment of the gas. On the one hand, take-or-pay commitments can be critical to the supplier's ability to obtain financing for the large capital costs necessary to produce and transport natural gas or LNG because the take-or-pay revenues are pledged as security.2 On the other hand, the take-or-pay commitment may become financially onerous for the buyer when it cannot sell the gas at an adequate margin. A prolonged imbalance may actually destroy a buyer. Or, in a favorable end-user market, the buyer can enjoy an excessive profit. In this con