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An LNG supply contract—normally a sale-and-purchase agreement (SPA)—sets the annual volume a buyer is entitled or obliged to purchase, the price formula, where and when cargoes are delivered, and what happens when either party cannot perform. The commercial risk is concentrated in five negotiated areas: volume commitments and take-or-pay, benchmark pricing, shipping and title transfer, destination flexibility, and remedies for non-performance.
What an LNG supply contract actually does
An SPA turns a liquefied-natural-gas project into a predictable stream of cargoes and payments. It allocates annual contract quantity (ACQ), loading or delivery windows, nominations, vessel requirements, LNG quality, measurement methods, invoices, credit support, and legal remedies. The contract also says which risks remain with the seller and which move to the buyer.
The European Union’s contract-transparency framework treats quantities, delivery points, nomination schedules, quantity flexibility, suspension or termination, force majeure, governing law and arbitration as material information. Those subjects are not boilerplate: a small wording difference can change a buyer’s exposure by millions of dollars over a multi-year term.
| Commercial subject | Questions the SPA must answer |
|---|---|
| Volume | What is the ACQ, the cargo size, and the permitted upward or downward tolerance? |
| Payment | Does the buyer pay only for delivered LNG, or also for a shortfall under take-or-pay? |
| Price | Which benchmark, slope, constant, currency, transport adder and review mechanism apply? |
| Delivery | Who books the ship, bears freight and insurance, and chooses the receiving terminal? |
| Operations | How are nominations, loading windows, vessel compatibility, quality and measurement handled? |
| Legal protection | What security, force-majeure relief, suspension, termination and dispute procedures apply? |
Take-or-pay: paying for volume that is not lifted
The basic mechanism
Under take-or-pay, the buyer must pay for the contracted quantity even when it physically receives less LNG, subject to the negotiated allowances. JOGMEC defines the obligation as payment for the quantity not actually received when offtake falls below the contract amount. The usual starting point is an ACQ multiplied by a take-or-pay percentage, followed by adjustments for permitted downward quantity tolerance (DQT), seller default and qualifying force majeure.
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For example, an SPA might establish a 1 million tonne ACQ, a 90% take-or-pay level and a 5% DQT. In a year with no contractual excuse, the buyer could nominate 850,000 tonnes yet still owe for the applicable minimum after the DQT is applied. The exact calculation depends on whether the contract measures the obligation by tonnes, energy content, cargoes or a monthly schedule.
Make-up, deferral and expiry
A payment without a recovery right is much harsher than one that creates future value. Make-up rights allow a buyer that paid for undelivered LNG to take equivalent volume in a later period, usually after paying the then-applicable variable costs. Deferral rights move a scheduled cargo to a later date without treating it as a permanent shortfall.
- Check how many years a make-up credit remains valid and whether it expires at the end of the SPA.
- Determine whether make-up cargoes are available only after the buyer meets the current year’s minimum.
- Read the order of use: some contracts apply new ACQ before make-up volume, while others require older credits to be used first.
- Identify whether a credit is refunded, converted into a payment offset or lost when the contract terminates.
Seller and buyer defaults
If a buyer fails to pay, the seller may draw a letter of credit or other security, charge interest, suspend deliveries, claim damages or terminate after a cure period. If the seller fails to deliver, the buyer may receive replacement-cost damages, make-up volume or termination rights, depending on the agreed remedy cap. A take-or-pay clause does not excuse the seller from its delivery obligation; it allocates the consequences of a buyer’s voluntary underlifting.
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The OECD notes that buyers can sometimes divert or resell overcommitted cargoes to reduce the economic cost of a take-or-pay obligation. That possibility depends on destination language, export authorization, terminal access, sanctions and any profit-sharing formula. It is not an automatic right in every SPA.
How LNG prices are calculated
Common formula structures
LNG SPAs normally use a formula rather than a fixed price. A simplified delivered-price equation is:
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LNG price = constant + (slope × benchmark) + agreed transport or other adders.
The constant can cover liquefaction, fixed project costs or other negotiated elements. The slope determines how strongly the LNG price follows the benchmark. The contract may also specify a floor, ceiling, inflation index, currency conversion and the timing of the benchmark observation.
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|---|---|---|
| Crude-oil linked | Japanese Customs-cleared Crude (JCC), Brent or another oil marker | Buyer’s LNG cost rises and falls with oil, subject to the slope and any floor or ceiling. |
| Gas-hub linked | Henry Hub or another published gas hub | Price follows gas-market conditions; liquefaction, fuel, shipping and fixed fees may be added separately. |
| Hybrid | A weighted combination of oil and gas benchmarks | Shares exposure between oil and regional gas markets. |
| S-curve | Usually an oil-linked formula with nonlinear limits | Sensitivity is reduced when the benchmark reaches very high or very low levels. |
The U.S. Energy Information Administration (EIA) reports that U.S. LNG contracts are usually linked to Henry Hub or Brent and commonly express the benchmark component as a percentage or slope. For U.S. developer contracts covered in its 2026 update, approximately 95% of sold volumes were under 20-year SPAs; that project-specific statistic is not a universal share of all global LNG contracts.
Price review and reopening
A price-review clause lets one or both parties seek a revised formula when the economic assumptions behind the SPA change. Reviews may be scheduled every three to five years or triggered by a large movement in oil prices, a regulatory change or a defined market event. RBA describes both bilateral renegotiation and trigger-based review mechanisms.
Read the procedure closely: notice deadlines, evidence requirements, negotiation periods, expert determination, arbitration and the price that applies while talks continue. A clause that permits a review but gives no interim price or dispute process can create a payment crisis precisely when the parties disagree.
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What the published statistics do—and do not—show
JOGMEC’s 2026 survey of Japanese term-contract ACQ found 70% (49 million tonnes) indexed to JCC, Brent and other crude-oil prices in fiscal year 2024. Its projections put the crude-oil-indexed share at 55% (36 million tonnes) in fiscal 2030 and 35% (16 million tonnes) in fiscal 2035. These are survey results for the covered Japanese contracts, not a forecast of every LNG contract worldwide.
FOB, DES and destination clauses
FOB: buyer controls the voyage
Under a free-on-board (FOB) SPA, the buyer takes title to and pays for LNG at the producing-country loading terminal. The EIA describes the arrangement as buyers taking ownership and paying at the loading terminal. The buyer normally nominates a compatible vessel, pays ocean freight and insurance, and bears the voyage risk after the contractual transfer point.
FOB can give a portfolio buyer greater control over shipping and destination. It also exposes that buyer to vessel availability, freight spikes, canal delays, weather and receiving-terminal constraints. The SPA still governs loading windows, acceptable ships, notice periods and what happens when a nominated vessel is late or rejected.
Delivered or DES: seller carries the cargo to the receiving point
In a delivered or delivered-ex-ship (DES) structure, the seller generally arranges transport and keeps more cost and operational responsibility until the specified receiving point. The precise transfer of title, risk, insurance and unloading costs is contract-specific; the label alone is not enough. A buyer should identify the exact terminal, the ship-to-shore connection point and the event that transfers risk.
| Issue | FOB | Delivered/DES |
|---|---|---|
| Loading-terminal payment | Buyer pays and takes title at the loading terminal, subject to the SPA. | Seller normally remains responsible for carriage to the named receiving point. |
| Shipping | Buyer usually charters or otherwise provides the vessel. | Seller normally arranges the vessel and voyage. |
| Flexibility | Often supports destination flexibility because the buyer controls the ship. | Flexibility depends on the named destination and seller’s ability to redirect the cargo. |
| Main buyer exposure | Freight, vessel, weather and terminal-coordination risk. | Less voyage exposure, but potentially less control and a higher delivered-cost formula. |
Can a buyer divert or resell a cargo?
Destination clauses determine whether a cargo must go to one receiving terminal, may be redirected within a defined network or can be sold to another market. The OECD reports a shift from rigid receiving obligations toward greater diversion or resale permission when markets are well supplied. The contract may require advance notice, seller consent, proof of regulatory compliance or sharing of resale profit.
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Practical flexibility is narrower than a sentence saying “any destination.” WilmerHale cautions that LNG moves periodically in large ship cargoes, so a buyer still needs a compatible vessel, a terminal with an open slot, import authorization, acceptable quality and a commercially viable voyage. For U.S. exports, the EIA says SPA contracts commonly allow delivery to any destination that complies with Department of Energy export authorizations and U.S. law; the authorization and the particular SPA must both be checked.
Quantity, scheduling and operational clauses
ACQ, tolerances and cargo programming
The SPA converts annual rights into cargoes through delivery schedules and nomination rules. It should state the standard cargo size, minimum and maximum cargo quantities, loading windows, annual and monthly tolerances, nomination lead times and procedures for changing a schedule. A buyer with seasonal demand needs to compare monthly flexibility—not just the headline ACQ—with storage and regasification capacity.
Quality and measurement
Quality provisions specify methane and heavier-hydrocarbon limits, nitrogen and inert gases, heating value, temperature, contaminants and interchangeability with the receiving system. Measurement clauses identify the custody-transfer meter, sampling method, calibration standard, energy-conversion formula and the process for a retest. They should also say whether off-specification LNG can be rejected, accepted at a price adjustment or blended to meet the specification.
Terminal and vessel compatibility
Loading and discharge terminals may impose restrictions on vessel dimensions, containment systems, manifold arrangements, arrival drafts, boil-off-gas handling and unloading rates. A ship that meets the seller’s technical standard may still be unacceptable at the buyer’s terminal. The SPA should allocate the cost of compatibility studies, modifications, delays and demurrage.
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Force majeure
Force-majeure language defines events that excuse or suspend performance, such as natural disasters, war, government action, terminal outages or certain equipment failures. It should require prompt notice, reasonable mitigation and evidence of the impact. Allocation rules matter when supply is short: the seller may have to share available cargoes among buyers, or the contract may prioritize particular obligations.
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Suspension and termination triggers
Common triggers include prolonged non-delivery, non-payment, insolvency, sanctions, loss of export or import authorization and a regulatory change that makes performance unlawful. Look for cure periods, termination fees, accrued make-up rights, treatment of prepaid amounts and the process for returning or drawing security.
Governing law and arbitration
The governing-law clause selects the legal system used to interpret the SPA. Arbitration clauses specify the institution or rules, seat, language, number of arbitrators, confidentiality and emergency-relief options. These choices affect the speed, cost and enforceability of a dispute award, particularly when the seller, buyer, ship and cargo are in different jurisdictions.
Credit support and payment protection
Long-term LNG commitments can create large unsecured exposures before a cargo is delivered. Sellers may require an irrevocable letter of credit, parent guarantee, cash collateral or a minimum credit rating. Buyers should check how collateral changes after a downgrade, how quickly a draw can be made, and whether a security dispute permits delivery suspension. Invoices should identify the benchmark publication date, currency, conversion rate, taxes, demurrage and any quality adjustment.
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How to compare two LNG SPAs
| Comparison axis | Questions to put side by side |
|---|---|
| Delivered-cost exposure | What benchmark, slope, constant, freight, fuel, terminal fee and tax produce the delivered price? |
| Volume risk | What are ACQ, take-or-pay percentage, DQT, make-up, deferral and expiry rules? |
| Destination and resale | Is the destination fixed? Can the buyer divert, resell or exchange cargoes, with what notice and profit share? |
| Operational reliability | Who controls the ship, loading window and schedule, and how are delays and terminal outages allocated? |
| Legal and credit protection | What security, remedies, force-majeure relief, suspension, termination, law and arbitration apply? |
A low benchmark slope may not be the cheaper deal if it carries a high constant, expensive freight, restrictive destination terms or a severe take-or-pay obligation. Compare the complete delivered-cost and flexibility profile under several demand and price scenarios.
What happens when the buyer does not take the contracted volume?
- Calculate the shortfall. Compare actual offtake with the ACQ, applicable take-or-pay percentage and DQT, while removing volumes excused by seller default or qualifying force majeure.
- Issue the contractual notice. The buyer should follow the nomination, underlift and make-up-notice deadlines; missing a notice can turn a recoverable cargo into an expired credit.
- Pay or apply permitted credits. The invoice may charge the shortfall, or the SPA may allow a make-up or deferral election.
- Use commercial mitigation. If permitted, the buyer can divert or resell a cargo, arrange a swap or optimize storage, subject to terminal, regulatory and profit-sharing conditions.
- Manage escalation. Repeated non-payment can lead to security draws, suspension, damages or termination. The parties should document causes and mitigation before a dispute hardens.
The outcome is therefore not simply “pay for gas you did not receive.” It depends on the exact minimum quantity, tolerance, recovery rights, destination permissions, excuse provisions and remedies negotiated in the SPA.
Quick Recap
Buyer and seller checklist before signing
- Model annual, monthly and cargo-level volumes under high-, base- and low-demand cases.
- Run the price formula against oil and gas benchmarks, including floors, ceilings, currency movements and transport adders.
- Confirm title, risk, freight, insurance and demurrage transfer points for every delivery basis.
- Verify that nominated vessels and receiving terminals meet all technical and scheduling requirements.
- Test make-up, deferral, expiry, diversion and resale rights with a missed-cargo example.
- Define quality, sampling, meter calibration, rejection and price-adjustment procedures.
- Check force-majeure notice, mitigation and allocation language for both supply and terminal outages.
- Review credit-support thresholds, draw rights, cure periods, suspension and termination consequences.
- Identify governing law, arbitration seat, expert procedures for technical disputes and the interim price during a review.
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