Generally speaking there are three major pricing systems in the current LNG contracts;
*Oil indexed contract (Japan, Korea, Taiwan and China)
*Oil, oil products and other energy carriers indexed contracts (Continental Europe)
*Market Indexed Contracts (US and UK)
In an indexed price formula there can be following elements;
CP = BP + β X
*BP = Constant Part or Base Price
*β = Gradient
*X = Indexation
This is the pricing structure that has been widely used in Asian LNG SPAs, where Base Price refers to a term that represents various non-oil factors, but usually a constant determined by negotiation at a level that can prevent LNG prices from falling below a certain level. It thus varies regardless of oil price fluctuation.
In a very simple definition, oil parity defines the proximity of LNG
price to crude oil price in terms of [[Barrel of oil equivalent|Boe]].
Closer the price of LNG to crude oil means the higher oil parity and if price of LNG equates the price of crude oil in [[Barrel of oil equivalent|Boe]] terms then that is the full oil parity situation. In the case that LNG price exceeds the price of crude oil in [[Barrel of oil equivalent|Boe]] terms then the situation can be defined as broken oil parity.
If the parties agree on coefficient of 0.1724 for indexation then it will result to the full oil parity situation whereby the LNG in terms of [[Barrel of oil equivalent|Boe]] would have the same price of one barrel of crude oil.
However in most cases price of LNG is less the price of Crude oil in [[Barrel of oil equivalent|Boe]] terms and for the gradient part typical figures are 0.1485 or 0.1558, and price of crude oil usually denominated in JCC.
In 2009, in several spot cargo deals especially in East Asia, oil parity approached the full oil parity or even exceeds oil parity.
Many formula include an S-curve, where the price formula is different above and below a certain oil price, to dampen the impact of high oil prices on the buyer, and low oil prices on the seller.
In most of the East Asian LNG contracts, price formula is indexed to a basket of crude imported to Japan called the [[Japan Crude Cocktail]] (JCC).
In Indonesian LNG contracts price formula is linked to [[Indonesian Crude Price]] (ICP).
In the continental Europe the price formula indexation doesn’t follow the same format and it varies from contract to contract.
Brent Crude Price (B) , Heavy Fuel Oil Price (HFO), Light Fuel Oil Price (LFO), Gas oil Price (GO), Coal Price, Electricity Price and in some cases Consumer and Producer Price Indexes are the indexation elements of price formulas.