If the contract cannot be terminated pursuant to the options above, a company may consider if it can renegotiate an unfavourable contract.
“Price re-opener” clauses are frequently found in long term off-take contracts within the energy market, particularly in long-term gas or LNG supply contracts. The pricing of such contracts, particularly in Asia, are often linked to oil prices. Although such contracts often contain an S-curve pricing formula, which is intended to alleviate the negative effect of low oil prices on the seller and high oil prices on the buyer, the inclusion of an S-curve pricing formula is unlikely to entirely eliminate the detriment to the seller of a 50% decline in Brent crude oil prices.
In general a price review process takes place in two stages. The first stage in the process involves a “trigger” where the party requesting a price review must demonstrate that the elements for initiating the price review have been satisfied. While there is no model form of price reopener, it is usual for the trigger to be a periodic option to review, as well as a “wild card” option to review. The wild card option could be a change in law, or importantly in this context, the occurrence of unforeseen economic hardship to one party.
The second stage of the process involves a determination of the manner in which the review must be conducted and how it is to take effect. Often the parties will be required to enter into good faith negotiations to effect a fair and equitable price revision. The price re-opener clause should also set out the consequences for failing to reach an agreement.
Price review clause discussions are (unsurprisingly) contentious. In recent years there has been a number of gas price arbitrations which have either proceeded to litigation in court, or been made public through press releases and market commentary. The cases largely stem from the disconnect between the oil price and the gas price – buyers had been forced to pay a price which rose with the oil price, when the price of gas using other indices or benchmarks had fallen. Much depends on the facts of the particular case, but there has been something of a pattern recently of buyers succeeding in having prices revised in their favour. For example, in 2012 and 2013 Edison (the buyer in both cases) was awarded €450m discount and a €300m discount in the RasGas and Sonatrach arbitrations respectively.