Energy Trading Disputes: Gas Price Reopeners

by King & Spalding
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When entering into long-term gas supply contracts, gas marketers, distributors, and utilities must account for the unpredictability of the market when agreeing on the correct price. This unpredictability has been accentuated by recent trends in the market, including most notably a drop in demand for gas in Continental Europe, an increased LNG supply world-wide, a decrease in LNG demand in North America as a result of unconventional gas production, and the economic recession. As a result of these forces, the price of gas on the spot or resale market has plummeted, while the oil-indexed price of gas, which many long-term gas supply contracts use as a pricing formula for gas, is on the rise. To address these challenges, most, if not all, long-term gas supply contracts contain a price review clause, permitting the parties to adapt the base price and gas pricing formula in their contract through negotiation or, if necessary, by recourse to arbitration. Austria's Econgas, France's GDF Suez, Germany's Wingas, and Slovakia's SPP have renegotiated their respective long-term contracts with Gazprom, and Germany's E.ON Ruhrgas and Poland's PGNiG have successfully secured gas pricing formula revisions through negotiation pending arbitration.

When negotiations fail, however, arbitration tribunals are increasingly signaling their willingness to grant buyers' requests for gas price modifications to take into account the resale price of gas. Arbitration of gas pricing disputes has become a necessary option for parties who need to revise their gas pricing formulas under long-term gas supply contracts. Two recent arbitration decisions illustrate this trend.

On April 23, 2013, an ICC tribunal issued an award revising the price formula in a long-term gas supply contract. The dispute arose under a 2003 contract between Italy's second largest gas importer, Edison, and the Algerian national oil and gas company Sonatrach. The inverted trajectories of gas pricing under oil-indexed contracts compared to the resale market prompted Edison to start negotiation of a new price formula with Sonatrach in 2011. When the parties were unable to reach agreement on a price reduction, Edison initiated a successful ICC arbitration. While the award has not been made public, the tribunal's decision to revise the contractual pricing formula is understood to grant Edison retroactive gas price reductions for the 2011-2013 periods and the Italian energy utility has estimated that the tribunal's award will have a positive impact of €300 million on its gross result for this year.

Another arbitration tribunal reached a similar result in a dispute between the Czech arm of the German energy company RWE and OAO Gazprom, Russia's state-owned gas company, under the parties' long-term gas supply contract. On June 27, 2013, an ICC tribunal set aside the oil-indexed pricing scheme in the parties' long-term contract and instead imposed spot natural gas prices. The tribunal imposed this amended gas pricing mechanism retroactively, leading some analysts to estimate that RWE will receive a refund from Gazprom of around €900 million ($1.236 billion) representing the excess RWE paid for gas since 2010. This decision followed on the heels of another RWE victory in a different ICC arbitration, in which RWE successfully asserted its right to reduce its take or pay obligation under the same contract.

These decisions recognize the disconnect between the oil and gas markets, and have significant consequences for world gas markets. Not only do they show that gas pricing disputes under long-term gas supply contracts are no longer a local—mostly Eastern-European—concern, they also show that arbitration tribunals are willing to take the necessary steps to revise gas pricing formulas where the economies of the contracts so require. Parties to long-term gas supply contracts are carefully following these developments and will undoubtedly take them into account when drafting or re-negotiating contract prices.

Jessica Beess und Chrostin
New York City
+1 212 556 2150
jbeesundchrostin@kslaw.com

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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