Erin Dyer, Daniel Reinbott, Melanie Williams

Like any commodity not committed to a customer, spot LNG will typically flow
to where the highest price is on any given day. Spot or short-term (up to about one
year) trades may be effected by way of a bespoke contract or by a standardised master
sales agreement which sets out the general terms and conditions, supplemented by
a short-form confirmation for each trade. The risk allocation between the parties in
a spot or short-term contract generally mirrors that in a long-term LNG contract;
however, many usually contentious provisions such as price and price-review, take-
or-pay and termination may be simplified due to the truncated (or one-off) nature of
the sale.
Despite their recent preponderance, spot and short-term sales are unlikely to
overtake long-term contracted sales due to the capital-intensive nature of the LNG
industry, which is explored above. In addition, as buyers are increasingly willing to
pay higher prices to secure supply for their regasification facilities and seemingly
insatiable domestic markets, capacity which may once have been spot is being
contracted for on a long-term basis.

(b) Swaps
Swaps, as the name suggests, occur where two buyers or two sellers agree to swap
cargoes. Swaps may be based on a geographic proximity (ie, where each sale involves
a considerable distance and therefore associated cost) or scheduling mismatch
rationale. For example, where seller 1 and buyer 2 are geographically more proximate
than seller 1 is to buyer 1, and vice versa in respect of seller 2 and buyer 1, the parties
may agree that it is more efficient (both in terms of time and cost) for each seller to
sell its LNG cargo(es) to the others original buyer (and the converse). A scheduling
mismatch may occur due to delays in commissioning of the sellers liquefaction or
the buyers regasification facilities which will eventually be the subject of a long-term
contract, or due to scheduled or unscheduled maintenance on either LNG facility. In
the case of a scheduling mismatch, the upside of any swap may be the saving of each
buyers take-or-pay liability under its long-term contract.
Any swap will usually require the consent of the relevant counterparties, and
how any cost savings or upside will be shared amongst the parties will be a matter
for negotiation between the four parties. Determining any cost savings will require a
consideration of the risk allocation regime in each underlying contract, and where a
party is asked to take a greater risk than envisaged in the original contract,
expediency and certainty usually dictate that the parties agree a fixed-sum
adjustment (eg, through a reduction in cargo price) rather than haggle over the
actual quantum of any upside. At the same time as settling the commercial terms of
any swap, the parties will need to verify the compatibility of each partys onshore
infrastructure and vessels.

(c) Arbitrage
The global LNG market is not yet fully liquid and, as noted above, divergences in
LNG prices in the US, European and AsianPacific markets create arbitrage
opportunities for LNG buyers and sellers to redirect a cargo to a market offering a
higher price. The Atlantic Basin is the most susceptible to price arbitrage as it has the

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