Since 2019, global LNG markets have witnessed unprecedented volatility. This has brought into sharp focus contractual terms in both long-term contracts and master sale and purchase agreements (MSPAs) used for shorter-term trades. We have seen clauses that have sat unchanged and unconsidered for many years suddenly being scrutinised by lawyers and arbitrators trying to discern their meaning and effect. At the same time, waves of price reviews under long-term contracts have had to contend with fast-changing market conditions.

What next for the LNG market?

The pricing "rollercoaster" has continued into 2024. The past few weeks have witnessed European gas and LNG prices falling to levels not seen since late 2020. It remains to be seen whether these lower prices will persist. However, they might lead to remorse on the part of buyers who scrambled to buy volumes and regasification capacity at high prices in 2022. They may start to look for ways to avoid buying that LNG or paying for that capacity.

Further, as substantial new supplies of LNG start coming online from 2026, many analysts think demand may fail to keep up. They believe the prospect of an LNG "glut" and falling prices (like those seen in 2019) looms. How the Biden administration's recent decision to reconsider how it licenses new LNG export terminals will impact this remains to be seen. Considerable uncertainty remains around how the global LNG market will evolve. 

All this leads us to believe that the immediate future of the LNG market is as turbulent as the recent past. That means that the price reviews and delivery disputes we have seen over the past four years or so are likely to remain prevalent for some time to come.

Volatility: the crash and the famine

Early 2019 finally witnessed the arrival of the LNG supply glut that many had anticipated for several years. From early 2020, the global COVID-19 pandemic exacerbated the imbalance between LNG supply and demand. Already low LNG prices resulting from oversupply in 2019 fell to historical lows by mid 2020 as worldwide lockdowns depressed economic activity and demand for gas.
As this price "crash" took hold, we saw several LNG buyers for the first time in years looking for ways to avoid having to take cargoes (or pay for them). Scheduling clauses under long-term contracts that had operated without issue since time immemorial became contentious as buyers made "late" decisions to cancel cargoes. Further, facing take-or-pay liabilities, buyers tried to claim force majeure under clauses that had not been reviewed since they were written long ago. Of course, trying to claim force majeure for the economic impacts of the pandemic in circumstances where the pandemic itself did not prevent the buyer performing its obligations proved somewhat optimistic. Finally, buyers triggered price reviews to try to take advantage of lower current prices and expectations that prices would remain depressed for years to come.

The price "crash" was followed by an almost equally dramatic price rise from late 2020. Increased economic activity as the world emerged from the pandemic, combined with a cold northern hemisphere winter, led to a sudden surge in demand. This coincided with several LNG producers facing unexpected outages as well as the deferral of new projects and expansions due to the price crash finding it difficult to re-mobilise quickly as global supply chain problems arose. Suddenly, there was an LNG "famine".

Accordingly, LNG prices climbed relentlessly in 2021 and surged further in early 2022 after Russia's invasion of Ukraine. Europe, heavily dependent on supplies of Russian gas, suddenly found itself urgently seeking alternative gas sources. Buyers, as keen to secure limited regasification capacity as to buy LNG, were willing to sign up to long-term capacity contracts. The surge in demand for LNG in Europe led to cargoes being diverted from Asia to Europe for the first time in many years and pushed LNG prices to historical highs in H2 2022.

As the market shifted dramatically, so too did the focus on contractual terms. Sellers' claims for a "failure to take" were suddenly replaced with buyers' claims for "failure to deliver". Contractual limitation of liability clauses were now being examined in detail. Buyers' allegations of "wilful arbitrage" by sellers taking advantage of high prices to divert cargoes to more lucrative markets were deployed, not only to trigger wilful misconduct carve-outs from liability caps but also to support more "creative" attempts to avoid those caps where there was no such carve-out. Reassuringly for sellers, our experience is that arbitrators applying English law have not been willing to countenance such creative arguments and have upheld contractual caps. Finally, buyers' price reviews suddenly mutated into sellers' price reviews as price formulae failed to keep pace with market prices.

LNG disputes on the horizon

LNG supply and demand forecasts are difficult to predict with any degree of certainty. Unpredictability often leads to contracts becoming economically lopsided and the disadvantaged party seeking a way out. That has led to the raft of recent LNG disputes we have seen. We expect similar disputes to continue arising.