Markets: frequently asked questions

What is a sale and purchase agreement?#

A long-term bilateral contract, historically running fifteen to twenty years, that sets the volume, delivery terms and price formula between one seller and one buyer, negotiated directly rather than through a public auction.

How does a tender differ from a bilateral SPA?#

A tender is a competitive process where a buyer or seller sets out what it needs and invites bids, choosing the best offer rather than negotiating with one counterparty from the outset. It suits shorter or smaller volumes than a full long-term SPA.

What counts as a spot cargo?#

A single shipment sold close to its loading or delivery date, priced against the market conditions of the moment rather than a formula fixed years earlier. It is the smallest and most flexible unit of trade in the industry.

Why does most LNG still move under long-term contracts?#

Because a liquefaction plant costs billions of dollars and lenders want revenue certainty over its operating life before financing it, and a portfolio of long-term SPAs is what has historically provided that certainty.

Is the balance between long-term and spot trade fixed?#

No, it shifts with how much new capacity is being financed and how confident buyers and sellers feel about future supply. The mechanisms themselves are stable even as the mix between them moves.

From How LNG is actually bought: SPAs, tenders and spot.

Why is LNG priced against oil rather than gas?#

Historically because there was no liquid, trusted gas price benchmark when the earliest long-term contracts were written, and LNG was competing directly against fuel oil in many markets, so pricing it as a function of oil made commercial sense at the time.

What is a slope in an LNG contract?#

The coefficient applied to the oil price in the formula, expressed as a percentage. A higher slope means the gas price moves more for a given change in the oil price; the exact value is a negotiated term, not a market-quoted figure.

What is an S-curve?#

A price formula whose slope flattens at very high and very low oil prices, so neither party bears the full extremity of an oil price swing. It is a risk-sharing mechanism built into the formula's shape rather than a separate instrument.

Is oil indexation disappearing?#

It remains common in specific markets and specific vintages of contract, particularly parts of Asia, while newer contracts — especially those referencing US supply — lean more toward hub pricing. The direction of travel is well documented; the pace and endpoint are contested.

Does oil indexation mean the gas price tracks oil exactly?#

No. The formula applies a slope and typically a floor and ceiling or S-curve shaping, so the gas price moves with oil but rarely in exact proportion, and the specific formula is unique to each contract.

From Oil indexation, slopes and the S-curve.

What is JKM?#

The Japan Korea Marker, a benchmark spot price for LNG delivered into north-east Asia, published by a price reporting agency from assessed market activity rather than a single exchange.

What is TTF?#

The Title Transfer Facility, a virtual trading point for gas in the Netherlands that functions as continental Europe's principal gas price benchmark, covering both pipeline gas and the gas LNG cargoes are regasified into.

What is Henry Hub?#

A physical pipeline junction in Louisiana whose price is the benchmark for gas in the United States, and the reference most US-origin LNG export contracts use for their pricing formula.

Is there one global LNG price?#

No. LNG trades in three broadly distinct regional price environments, and while cargoes can and do move between them, the price relationship between the benchmarks changes with shipping availability, seasonal demand and how much spare capacity exists to arbitrage the difference.

Why do these benchmarks matter if my contract is oil-indexed?#

Because even an oil-indexed contract's economics are judged against what hub-priced alternatives are doing, and buyers and sellers negotiating new contracts reference the hubs regardless of how the deal in front of them is ultimately structured.

From Hub pricing: JKM, TTF and Henry Hub.

What is a destination clause?#

A term in a long-term LNG contract restricting the buyer to reselling or delivering the cargo only to a specified market or region, rather than reselling it freely wherever the price is best.

Why would a seller want a destination clause?#

To protect its own position in the buyer's home market by preventing the buyer from reselling the same cargo back into a market the seller serves directly, and to preserve price discrimination between regions the seller supplies under different terms.

Have destination clauses been challenged legally?#

Yes, competition authorities in multiple jurisdictions have investigated and in some cases restricted their use, on the grounds that they can limit resale competition and prevent gas from reaching the market that values it most.

Does removing a destination clause guarantee a cargo will actually be diverted?#

No. It removes the contractual barrier, but whether a cargo actually moves depends on whether diverting it is commercially worthwhile once shipping cost and scheduling are accounted for, which is a separate question covered in arbitrage.

Are destination clauses gone from the market entirely?#

Regulatory pressure and buyer preference have both pushed toward contracts without them, but the pace and completeness of that shift varies by region and by the age of the specific contract in question.

From Destination clauses and cargo diversion.

Why does an LNG project need offtake agreements before it can be built?#

Because a liquefaction plant costs billions of dollars and takes years to build with no revenue in the meantime, and lenders will not commit that capital without confidence that enough of the plant's future output is already committed to paying it back.

What is a tolling agreement?#

An arrangement where a customer supplies its own gas to the plant and pays a fee for it to be liquefied, keeping ownership of the gas throughout, rather than buying LNG from the plant owner as a finished product.

How does tolling change who bears commodity price risk?#

Under tolling the customer owns the gas and bears the risk of its market price; the plant owner earns a largely fixed fee for the liquefaction service regardless of what the gas or the finished LNG is worth.

What is project finance in this context?#

Debt raised against the project's own future cash flows and assets, rather than against the general balance sheet of its sponsors — a structure that makes the strength and quantity of a project's offtake agreements central to whether lenders will provide it.

Does more offtake always mean a faster path to construction?#

Generally, but the relationship is not mechanical — the creditworthiness of the buyers, the length and terms of the agreements and the overall market environment for financing all factor into whether a given stack of offtake is judged sufficient.

From Tolling, offtake and how projects are financed.

What does take-or-pay actually mean?#

That the buyer must pay for an agreed minimum quantity in a given period whether or not it takes delivery of the full amount, so the seller's revenue does not depend on the buyer's demand actually materialising as expected.

Why would a buyer accept an obligation to pay for gas it might not need?#

In exchange for a lower or more favourable price than a fully flexible, no-obligation contract would command, and because a stable, guaranteed supply is itself valuable to a buyer that cannot risk running short.

Is take-or-pay the same as a fixed volume requirement?#

No. It typically sets a minimum quantity below the full contracted volume, so a buyer can take anywhere from that minimum up to the maximum without penalty, and pays the take-or-pay minimum only when it takes less than that floor.

Can a take-or-pay obligation be renegotiated?#

Yes, and it has been, particularly when demand shifts have made an original take-or-pay level plainly unworkable for the buyer over a sustained period — but renegotiation is a negotiated exception, not a right built into the mechanism.

How does take-or-pay relate to a project getting financed?#

It is one of the specific contractual features lenders look for within an offtake agreement, because it converts an intention to buy into a payment obligation independent of the buyer's own demand fluctuations, which is exactly the kind of certainty project financing depends on.

From Take-or-pay and the shape of the obligation.

What triggers an LNG arbitrage trade?#

A gap between two regional benchmark prices wide enough that the netback achievable in the higher-priced market exceeds what could be earned in the original destination by more than the incremental cost of shipping there.

Does a price gap between regions always get arbitraged away?#

No. It only closes if a ship and berth slot are actually available at the right time and the netback advantage survives after shipping cost, and even then the closing happens gradually as cargoes redirect, not instantly.

What is basis in this context?#

The price difference between two benchmarks or delivery points, such as the gap between JKM and TTF. Traders watch the basis directly, since it is the basis rather than either price alone that determines whether an arbitrage trade is worthwhile.

Can arbitrage activity itself affect shipping costs?#

Yes. A wave of cargoes chasing the same arbitrage opportunity increases demand for ships on that route, which can raise freight rates and erode the very netback advantage that motivated the trades in the first place.

Is arbitrage only relevant to traders?#

No. It is also what links the world's regional gas markets together over time, so understanding it explains why a supply disruption in one ocean basin can eventually show up as a price effect in a completely different one.

From Arbitrage: when a cargo changes ocean.

What actually happens at a final investment decision?#

The project's owners commit to fund construction, main construction contracts are signed, and financing — whether from the sponsors' own balance sheets, project debt, or a combination — is put in place to pay for building the plant.

Does an FID guarantee a project will be completed?#

It confirms the owners have committed capital and signed contracts, which is a far stronger signal than a proposal, but construction projects can still face delays, cost overruns or, rarely, cancellation after FID, so it is a strong indicator rather than an absolute guarantee.

What is a positive FID versus other kinds of investment milestones?#

A positive FID specifically means the decision to proceed was made; industry commentary sometimes discusses projects moving toward FID, or targeting an FID date, both of which describe a project that has not yet reached the actual decision point.

Why do some projects reach FID quickly and others sit at proposed for years?#

Mainly because of how quickly a project assembles sufficient offtake commitments and financing, which depends on buyer demand, project economics, permitting timelines and the broader financing environment, all specific to that individual project.

Does GEM's status field record FID directly?#

The tracker records a project status category and, where reported, an FID status and year, though not every source discloses the exact FID date, and the fields render as not reported when the underlying documentation does not specify it.

From Reading a final investment decision.