Pipeline gas and liquefied natural gas ("LNG") are usually sold under long-term gas sales agreements ("GSAs"). The duration of a GSA typically exceeds a decade (and is often twenty years) to guarantee a producer's revenue stream needed to finance their project.
Given the long-term nature of GSAs, it is difficult, if not impossible, for the parties to agree on a fixed price for the gas being bought/sold. At the same time, the frequent take-or-pay obligations imposed by a GSA require a pricing mechanism that ensures certainty of the price. For this reason, a typical GSA will rely on a pricing formula to calculate the sale price of gas or LNG.
The various elements of such formulae are outside the scope of this article. However, it is important to understand that formulae are not straightforward. By way of example:
PGAS = K x (α x PFUEL OIL x (HGAS / HFUEL OIL) + β x PLPG x (HGAS / HLPG) X (1 + R)
PGAS – natural gas city gate price (tax included) in a currency/cm;
K – discount rate;
α, β – weighted percentage of fuel oil and LPG, e.g. 60% and 40% respectively;
PFUEL OIL, PLPG – import price during the period in currency/kg;
HFUEL OIL, HLPG,HGAS – heat content of fuel oil, heat content of LPG, and heat content of natural gas (e.g. 10,000 Mcal/kg, 12,000 Mcal/kg and 8,000 Mcal/kg respectively);
R – natural gas VAT rate.
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To discuss the issues raised in this update further, contact our Head of Energy & Industrials, Slava Kiryushin