Ask why a gas cargo is priced off the cost of crude oil and the honest answer is history: the formula persists from an era that had no better option, and enough contracts still use it that understanding the mechanism matters even as newer deals move elsewhere.
Why oil, and not gas
When the earliest long-term LNG trades were structured, there was no established, liquid, widely trusted gas price benchmark comparable to what oil markets already had. LNG was also competing directly against fuel oil in the industrial and power markets it was entering, particularly in Japan following the oil shocks, so pricing gas as a function of the fuel it was displacing was a defensible commercial choice at the time — not an oddity, but a reasonable answer to the market that existed then.
The formula has outlived the specific conditions that produced it, which is a common feature of long-term contracts: a structure agreed for good reasons under one set of circumstances continues to govern transactions long after those circumstances changed, simply because renegotiating an existing contract is harder than writing a new one on different terms.
The slope
The basic oil-indexed formula multiplies an oil price marker by a coefficient, called the slope, and adds a constant. The slope is expressed as a percentage and is a negotiated term specific to each contract — it reflects the relative bargaining position of buyer and seller, the length and volume of the contract, and prevailing market conditions when the deal was struck, rather than being drawn from any public reference table.
A higher slope means the resulting gas price is more sensitive to movements in the oil marker; a lower slope means the gas price is more stable but responds less to genuine shifts in the relative value of the two fuels. Neither is inherently correct — the choice reflects how much oil-price risk each side is willing to accept, which is itself a negotiation.
The S-curve
A straight-line slope exposes both parties fully to extreme oil price movements: a very high oil price pushes the linked gas price very high, benefiting the seller and straining the buyer; a very low oil price does the reverse.
An S-curve formula addresses this by flattening the slope’s response at both ends of the oil price range — above some threshold the gas price rises more slowly than the straight-line formula would imply, and below another threshold it falls more slowly. The effect is to share the extremes of oil price risk between the two parties rather than concentrating either the upside or the downside entirely on one side. It is a shaping of the formula’s response, not a separate contractual instrument, and the specific thresholds and degree of flattening are again negotiated rather than standardised.
Whether it is going away
Contracts referencing US Gulf Coast supply have generally moved toward Henry Hub-linked pricing rather than oil indexation, reflecting both the different cost structure of that supply and buyers’ growing appetite for gas-referenced rather than oil-referenced pricing. Oil indexation nonetheless remains genuinely present in specific markets and specific contract vintages, particularly longer-established Asian buyers with legacy agreements still running.
The direction — a gradual relative shift toward hub-referenced pricing across new contracts — is well documented. The pace of that shift and how far it ultimately goes are actively debated among people who follow the market closely, and this module does not attempt to resolve that debate with a specific market-share figure, because any such figure would be a snapshot of a moving target rather than a stable fact.
What this means for interpreting a price you encounter
A quoted LNG price attributed to “the market” is frequently a spot or hub-referenced figure, while a price actually paid under a specific long-term contract may bear only a loose and delayed relationship to it, because the contract’s formula was negotiated against a different reference at a different time. Two buyers receiving cargoes on the same day, under different vintages of contract, can genuinely be paying different prices for economically similar gas — not because either is being cheated, but because their contracts reference different things in different proportions.