An LNG contract is a long-term sale and purchase agreement that governs how liquefied natural gas moves from a liquefaction plant to a buyer, and understanding how LNG contracts work comes down to four things: what volume the buyer commits to, how the price is calculated, how delivery risk is split, and what happens when something disrupts the arrangement. These agreements typically run 20 years, cover billions of dollars of gas, and give project developers the revenue certainty they need to finance multibillion-dollar liquefaction plants and specialized tanker fleets.
From Handshake to Binding Deal
LNG transactions rarely start with a binding contract. The parties usually sign a Memorandum of Understanding first, a non-binding document in which a potential seller and buyer agree to explore a deal. The MOU lays out basic intentions, confidentiality obligations, and a general timeline for negotiations, but carries no obligation to actually buy or sell gas.
If early talks go well, the parties advance to a Heads of Agreement. An HOA identifies specific commercial terms like expected volumes, a delivery window, and a pricing framework. Most of its provisions remain non-binding, though clauses covering confidentiality and exclusivity usually are enforceable. The HOA functions as a detailed roadmap toward a final deal while preserving each party’s ability to walk away without major financial consequences.
The binding commitment arrives with the Sale and Purchase Agreement. The SPA triggers financial obligations, underpins project financing, and drives construction decisions. In 2023 alone, signed SPAs supported three new U.S. LNG projects moving into active construction, with roughly three-quarters of contracted volumes locked in for 20-year terms.1U.S. Energy Information Administration. LNG Sale and Purchase Agreements Signed in 2023 Support U.S. LNG Projects
Conditions Precedent
An SPA doesn’t always take full effect the moment it’s signed. Most agreements include conditions precedent, a set of milestones that must be met before core delivery and payment obligations kick in. These typically require the seller to secure government approvals, arrange financing for the liquefaction facility, and reach a positive Final Investment Decision. A real Sabine Pass contract required the seller to have received construction permits, closed financing arrangements, issued an unconditional notice to proceed with construction, and confirmed that all export authorizations remained in effect.2U.S. Securities and Exchange Commission. Gas Natural LNG Sale and Purchase Agreement If any condition goes unmet by the agreed deadline, either party can usually terminate without liability.
Volume and the Take-or-Pay Obligation
At the center of every SPA sits the Annual Contract Quantity, or ACQ. This is the total volume of LNG the seller must offer and the buyer must accept over a given year, and every other commercial term revolves around it.
To guarantee the seller enough revenue to service project debt, contracts include a take-or-pay clause. The buyer must pay for a minimum share of the ACQ regardless of whether they actually take delivery, typically between 80% and 95%. A buyer who can’t absorb the gas still writes the check. This is where project economics get their teeth: lenders won’t finance a $10 billion liquefaction plant without contractual proof that revenue will flow even if the buyer’s demand dips.
Buyers who pay for unlifted volumes don’t lose that money outright. Most contracts grant make-up gas rights, allowing the buyer to claim those paid-for volumes in a later contract year, but only after meeting that year’s minimum take-or-pay obligation first. The sequencing matters. A buyer can’t use make-up entitlements to avoid the current year’s minimum payment, which protects the seller’s cash flow while giving the buyer a path to recover value over time.
Contracts also build in flexibility bands, usually letting the buyer request slightly more or less than the ACQ in a given year to accommodate seasonal swings without triggering penalties. These upward and downward flexibility options are typically expressed as a percentage above or below the ACQ.
How the Price Is Set
LNG pricing falls into three broad regimes: oil-indexed, hub-indexed, and government-regulated. The first two dominate commercial contracts.
Oil-Linked Pricing
The oldest and still widely used model ties the LNG price to a crude oil benchmark, most commonly Brent crude or the Japan Customs-cleared Crude price (sometimes called the Japanese Crude Cocktail). The formula multiplies the oil benchmark by a “slope” coefficient. Older Asian contracts typically used a slope of around 14.5% of the JCC price, meaning that for every dollar-per-barrel change in oil, the LNG price moved by about 14.5 cents per million BTU. More recent contracts have varied, with an upper bound around 17.2% at which LNG reaches rough price parity with oil on an energy-equivalent basis.3CME Group. Is Oil-Indexation Still Relevant for Pricing Natural Gas The formula usually includes a constant term to cover base costs like shipping.
To protect both sides from extreme oil price swings, many oil-linked contracts add an S-curve to the pricing formula. Instead of a straight-line relationship between oil and gas prices, the S-curve flattens the slope at very high and very low oil prices. That creates a price ceiling shielding the buyer when oil spikes and a price floor protecting the seller during crashes.
Hub-Indexed Pricing
The alternative model ties LNG prices directly to natural gas trading hubs. In the United States, Henry Hub in Louisiana serves as the dominant benchmark. It connects onshore and offshore pipelines across the Gulf Coast and underpins the NYMEX natural gas futures contract.4Intercontinental Exchange. Natural Gas Benchmarks: A New Landscape Cheniere Energy, the first U.S. company to export LNG, exclusively used Henry Hub indexation in its early take-or-pay agreements. In Europe, the Title Transfer Facility in the Netherlands has overtaken the UK’s National Balancing Point as the leading gas-on-gas benchmark, driven by growing liquidity in euro-denominated forward markets.
Hub-indexed pricing reflects actual gas supply and demand rather than tying LNG to an entirely different commodity. As more U.S. export capacity comes online and global gas markets grow more interconnected, hub-based formulas have gained ground at the expense of traditional oil-linked structures.
Price Reviews
Long-term contracts don’t lock in a single formula forever. Most SPAs include a price review clause that lets either party request a renegotiation if market conditions have shifted materially. Reviews commonly trigger every three years, though some contracts allow longer intervals of up to five or even ten years depending on the original terms. If the parties can’t agree on revised pricing, the dispute typically escalates to arbitration, which can involve years of litigation and hundreds of millions of dollars at stake.
Delivery Terms and Diversion Rights
How a cargo is delivered determines which party controls the ship, bears the transit risk, and can redirect the gas to a different buyer.
FOB Versus DAP
Under Free on Board terms, risk and responsibility transfer to the buyer the moment the LNG is loaded onto the vessel at the export terminal. The buyer arranges and pays for shipping, which also gives them greater control over where the cargo ultimately goes.5Tulane University. Model Diversion Clause for LNG Sale and Purchase Contracts FOB contracts are increasingly common among U.S. exporters.
The opposite approach, historically known as Delivered Ex-Ship, placed all shipping costs and transit risks on the seller until the cargo reached the destination port. The DES term was retired from international trade rules in 2011 and replaced by Delivered at Place. Under DAP, the seller still bears all costs and risks of bringing the LNG to the named destination, but the buyer handles unloading and import customs. The practical difference for LNG is that DAP sellers retain control of the vessel and routing, which limits the buyer’s ability to redirect cargoes.
Diversion and Profit Sharing
FOB contracts often grant the buyer explicit diversion rights, letting them reroute a cargo to whichever terminal offers the best price at that moment. If Asian spot prices spike above European levels, a buyer holding an FOB cargo loaded in the Gulf of Mexico might redirect the ship from Europe to Japan. This flexibility is one of the most commercially valuable features of modern LNG agreements.
Sellers want to share in the windfall when a buyer diverts cargo to a higher-priced market. Most contracts that allow diversion include a profit-sharing mechanism. The additional revenue earned above what the buyer would have paid at the original destination is typically split equally between the parties.
Older contracts, particularly those signed by legacy Asian buyers, often included fixed-destination clauses that prohibited any diversion at all. These restrictions ensured the seller maintained control over regional pricing and prevented its own buyer from competing with it in other markets. Regulatory pressure, including scrutiny from the Japan Fair Trade Commission, has pushed the industry away from rigid destination restrictions and toward more flexible arrangements.
Contract Length and Where the Market Is Heading
The length of an LNG contract reflects a tension between the seller’s need for revenue certainty and the buyer’s desire for flexibility.
Long-term agreements, historically 20 years or more, remain the standard for financing new liquefaction capacity. About three-quarters of volumes contracted in recent U.S. SPAs carried 20-year terms, starting when the project begins commercial operations.1U.S. Energy Information Administration. LNG Sale and Purchase Agreements Signed in 2023 Support U.S. LNG Projects This duration aligns with the economic life of the liquefaction plant and gives lenders confidence that debt will be repaid. Oil-indexed long-term contracts have historically run 20 to 25 years across most regions.3CME Group. Is Oil-Indexation Still Relevant for Pricing Natural Gas
The market is shifting. The International Group of LNG Importers (GIIGNL) defines short-term contracts as anything under four years, and spot trades as volumes delivered under contracts of one year or less. By that measure, spot and short-term volumes accounted for roughly 36% of global LNG imports in 2024, down slightly from 39% the previous year but still a huge share of trade that barely existed two decades ago. As legacy 20-year contracts signed in the early 2000s expire, many buyers are replacing them with shorter commitments. Oman LNG, for instance, saw its original contracts expire after more than 20 years and signed several replacement deals of less than 10 years with buyers in Thailand, Germany, and Japan.6S&P Global. Long-Term LNG Contract Tenures Seen Shortening Amid Changing Supply-Demand Dynamics
Force Majeure and Risk Allocation
Every LNG SPA includes a force majeure clause because the supply chain faces risks that no amount of planning can eliminate. Hurricanes shut down Gulf Coast terminals. Earthquakes damage receiving facilities. Wars and sanctions disrupt shipping lanes. Force majeure provisions suspend the affected party’s obligations when events beyond their control make performance impossible or impractical.
Qualifying events typically fall into two categories. Natural disasters include earthquakes, tsunamis, hurricanes, floods, and epidemics. Human-caused disruptions cover war, terrorism, strikes, government embargoes, sanctions, and refusal to grant licenses. More recent contracts have expanded these lists to include cyberattacks and severe supply chain failures.
Declaring force majeure isn’t as simple as pointing to a news headline. The affected party must give prompt written notice detailing the event, explaining how it prevents contract performance, and estimating how long the disruption will last. Many contracts require ongoing status reports at regular intervals and may give the other party the right to inspect or verify the claimed conditions. The obligation to mitigate is universal: a party claiming force majeure must show it’s taking reasonable steps to resume performance as quickly as possible.
Force majeure suspends obligations but doesn’t erase them. If a seller can’t deliver for six months due to facility damage, the buyer’s take-or-pay obligation for those volumes is typically suspended as well. The contract stays in place, and performance resumes once the event passes. Prolonged force majeure events, sometimes exceeding 12 to 24 months, can trigger termination rights for either party if there’s no realistic prospect of resuming deliveries.
Gas Quality Specifications
LNG isn’t a uniform product. Different liquefaction plants produce gas with varying compositions depending on the feed gas and processing methods. Every SPA specifies acceptable quality parameters, and the most important is gross heating value, measured in British thermal units per standard cubic foot. Regional trading benchmarks give a sense of the typical range: the Japan-Korea Marker standard spans 1,030 to 1,130 BTU per cubic foot, while European benchmarks typically accept 1,010 to 1,130 BTU.7S&P Global. Specifications Guide Global LNG Contracts also cap contaminants like sulfur and set maximum limits for non-methane components like ethane.
These specs aren’t just technical footnotes. A cargo that falls outside the buyer’s terminal specifications can be rejected at the discharge port, leaving the seller scrambling to find an alternative buyer willing to accept the off-spec gas. Some contracts include adjustment mechanisms where the price is modified to reflect quality deviations rather than triggering outright rejection, but the negotiation of those tolerances is one of the more contentious parts of SPA drafting.
U.S. Export Authorization
An LNG contract alone doesn’t let a U.S. seller ship the gas. Exporting LNG from the United States requires federal approval under Section 3 of the Natural Gas Act, which prohibits any person from exporting natural gas without first securing an authorization order.8Office of the Law Revision Counsel. 15 USC 717b – Exportation or Importation of Natural Gas The Department of Energy handles these applications, and the process differs depending on where the gas is going and how long the arrangement will last.
For any export arrangement longer than two years, a long-term authorization is required. The application must identify the buyer, the transporter, the border crossing point, and the geographic markets being served. It must also include the major commercial terms of the underlying SPA, covering base price, volume requirements, take-or-pay obligations, and make-up provisions. A signed legal opinion confirming the exporter has corporate authority to make the sale and a copy of the actual purchase contract must accompany the filing, along with a $50 fee.9Department of Energy. How to Obtain Authorization to Import and/or Export Natural Gas and LNG
Any LNG facility involved in interstate pipeline transportation must also obtain a certificate of public convenience and necessity from the Federal Energy Regulatory Commission under Section 7 of the Natural Gas Act.10Federal Energy Regulatory Commission. LNG FERC evaluates the environmental impact, safety design, and engineering of the terminal before granting approval. The DOE authorization and FERC certificate are independent requirements. A project needs both before it can legally export. These requirements apply to U.S. exporters; other producing countries have their own regulatory frameworks.
How Disputes Get Resolved
When an LNG contract dispute can’t be settled through negotiation, it almost always goes to international arbitration rather than a national court system. The amounts at stake are enormous, and neither party wants a commercial judge in the other side’s home country deciding the outcome. SPAs typically designate an arbitration institution and a seat of arbitration at signing. London, Singapore, and Paris are the most common seats, with institutions like the International Chamber of Commerce and the London Court of International Arbitration handling a significant share of LNG disputes.
Price review disagreements are the most frequent trigger. When a periodic review fails to produce a negotiated price and escalates to arbitration, the tribunal effectively sets the price for the next review period. These proceedings are confidential, but the commercial consequences leak into the market when adjusted pricing terms influence subsequent contracts. Take-or-pay disputes, force majeure claims, and cargo quality rejections round out the other common categories. The entire process, from filing to award, routinely takes two to four years and generates legal fees that can rival the disputed amounts themselves.