Comparison of Hardship Clause and Price Review Clause in Gas Sales Contracts

Natural gas and liquefied natural gas (LNG) are frequently traded through long-term take-or-pay contracts. These contractual arrangements, characterized by their extended duration and substantial investments in gas production, possess a unique nature in the energy industry. The execution of long-term contracts offers benefits for both sellers and buyers. On one hand, the sellers generate revenue from the obligations of receiving or paying, which serves to justify the investment in the high capital costs associated with gas production and transportation. On the other hand, buyers and customers attain a degree of supply security, safeguarding their energy needs over the contract's term.
Despite the advantage of long-term planning that these contracts afford, it is challenging for parties to anticipate and predict all possible future conditions accurately. Consequently, the initial assumptions on which the contract was based may not remain immutable throughout its lifespan. The prolonged nature of these contracts renders them susceptible to unforeseen events or circumstances that were not envisioned at the time of contract formation. The longer the agreement, and the more exposed it is to geological, commercial, and political risks, the greater its vulnerability to external events.
Among the components of the contract profoundly influenced by economic and market fluctuations, the contract price, especially concerning energy, particularly gas, stands out. Various events, ranging from political decisions to economic and market developments, can exert profound and potentially disruptive effects on the price of gas and LNG. Consequently, parties seek to manage the price risk through a variety of tools. Sometimes, they employ mechanisms external to the contract, such as storage and financial contracts. Alternatively, they may manage price risk by adopting strategies like price indexing based on competing energy sources. However, these solutions may not comprehensively address all unforeseen events. In response, "price review clauses" have been incorporated into gas sales contracts to introduce the necessary flexibility to adjust the contract price. These clauses serve as fundamental non-financial mechanisms for price management and support for the involved parties.
Price review clauses empower the revision of the contract price when severe and unpredictable price fluctuations occur during the contract's duration. This mechanism allows the affected party to find a solution to compensate and adapt the price formula without compromising the sanctity of the contract. As there is no predetermined standard for setting price review clauses, their structure and functionality may differ from contract to contract. Therefore, a detailed examination of their provisions and an extraction of common concepts and principles governing their revisions become of paramount importance. Enhanced comprehension of these clauses benefits both the contracting parties and those engaged in the market, fostering greater knowledge and transparency in negotiations and reducing potential ambiguities and doubts, which, in turn, saves considerable time and financial resources for all parties involved, including arbitrators who are tasked with resolving any disputes.
The primary research question that emerges is whether there is a genuine need to include price revision clauses despite the existence of hardship clauses in gas sales contracts. Are these two contractual provisions mere repetitions of each other, or do they serve distinct purposes?
This research endeavors to analyze the characteristics of both hardship and price revision clauses separately, employing the library method to review relevant literature, documents, and case law. By doing so, the research seeks to paint a clear picture of these clauses for the contracting parties and those with a vested interest in this field. Armed with this knowledge, parties can draft more precise and comprehensive price review clauses, and arbitrators can effectively resolve disputes with a heightened sense of insight and understanding.
An exploration of expert opinions in this field reveals that price review clauses are indeed independent of hardship clauses, possessing unique characteristics that set them apart from each other. While hardship clauses are established tools to compensate claimants facing economic hardship, they are concerned with mitigating the impact of changes on the parties' positions and allow for contract revision to alleviate the burden and costs borne by the injured party. Conversely, price revision clauses are specifically designed to ensure the equitable distribution of market profits between the buyer and seller. Arbitrators' primary focus in dealing with these clauses centers around maintaining competitiveness, facilitating fair profit sharing, and sustaining a harmonious and continuing contractual relationship between the parties involved. Although the inclusion of price revision clauses in gas sales contracts has experienced a decline, thanks to pricing models based on gas hubs and the prevalence of short-term contracts, they continue to hold significant importance in certain regions, especially in Asia, where long-term contracts remain subject to revisions.
In conclusion, natural gas and LNG long-term contracts have become essential instruments in the energy industry, ensuring a secure supply for buyers and providing financing for high capital investments in production and transportation for sellers. However, the extended duration of these contracts renders them vulnerable to unforeseen economic, political, and market changes. The contract price, in particular, is profoundly influenced by these fluctuations, necessitating the inclusion of price review clauses in gas sales contracts to provide flexibility and adaptability. Although similar in some respects, hardship clauses and price revision clauses serve different purposes and are essential in addressing distinct aspects of the contractual relationship. As the energy market evolves and the dynamics of gas sales contracts continue to shift, a comprehensive understanding of these clauses becomes increasingly important for the contracting parties, market participants, and arbitrators alike. By fostering transparency and enhancing knowledge, parties can effectively manage risks, while arbitrators can make well-informed decisions when resolving disputes. Thus, this research contributes valuable insights to the field, promoting better-informed and more efficient gas sales contract negotiations and dispute resolution processes.