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Arbitration and Gas Pricing/LNG Disputes

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


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