Long term (10+ years) gas supply contracts usually contain a gas price review clause. This protects the gas buyer and gas seller from circumstances where the contract price is significantly out of step with the market price – creating different challenges for both parties. The price review mechanism is intended to re-set the gas price to the market price. The gas contract provides a set of criteria that defines market price, with a negotiated outcome creating a re-set of the gas price.
With a lot of value at stake, these negotiations are usually very lengthy (unless time frames are predetermined in the contract), quite frequently intense (one sides gain is the other sides loss) and usually negotiated on imperfect and incomplete information around the market price. What are the key elements to this negotiation and what is the best way to achieve a good outcome?
Preparation
As with all negotiations, preparation significantly influences the outcome. Probably the key element is forming a view of the current gas market price. This can be challenging in gas markets where there is no traded market index, and parties privately contact gas on terms not disclosed. This is particularly so in WA. Although there are price indications for very small tranche’s of distressed gas 1 , and a published average gas price by WA Government 2 – all other gas is supplied under bi-lateral confidential contracts. BrightSource consulting can assist with detailed knowledge of the gas market that can supplement incomplete market indicators to ensure a thorough preparation.
A second key element of preparation is anticipating the position of the other contract party. What outcome are they likely to be planning for; how is the contract gas price affecting their business (compared to market price); how aggressive are they likely to be; are their other elements in the gas contract of value to the counterparty that could be introduced? Other considerations include securing legal support (for arbitration in the case of a dispute); ensuring timely notices where this is required to action a price review 3 ; and gaining appropriate authorities for settlement.
Organising
The critical element here is determining the target outcome. Based on a thorough preparation, a realistic and acceptable gas price aspiration should be developed and agreed. This should only change if new information comes to light during the negotiations. And the price aspiration should factor in the alternative outcome (e.g. arbitration) and the costs and risks associated with that. Once the price aspiration is set, this determines the value to be achieved (or lost) as a result of the negotiation. The value at stake helps thinking through non-price elements of the contract and whether it is practical and desirable to broaden the negotiation.
The next element is a strategy to achieve the outcome. What is the opening proposal? What are the key arguments to justify that position? What, when, how and why would that position change? What information is going to be shared that will help build a common understanding? What other actions might influence the counterparty toward the desired outcome? How often will meetings be required and who will lead the negotiations?
Negotiating
Traditionally, existing contract parties will have developed a good working relationship over time. The focus is likely to be on working together to achieve an agreed outcome. But with the value at stake this will take time and patience. The best negotiators I’ve seen in these circumstances develop a key set of arguments based on 3 or 4 fundamental propositions that justify the desired outcome. The key arguments used in negotiations need only be 2 or 3 for each proposition. There is an old saying that weak arguments undermine strong ones.
When at the table, the skill is to negotiate using your own style but to know the arguments well enough they can be used concisely, interchangeably and as the discussion requires. And the other key skill is to listen to the counterparty. What do you hear from their arguments that indicates what their position likely to be? What questions do you need to ask to fully understand their position?
Ultimately, even with great preparation, planning and negotiating, there still might not be an agreed outcome. Gas contracts usually contain a dispute settling mechanism that involves an independent arbitration process to arrive at a decision. It’s important to prepare for this possible outcome. It takes significant time and effort to brief legal counsel – and in some case – for counsel to subpoena confidential contracts to provide evidence for the arbitration proceedings. But both parties should continue negotiating until the actual proceedings commence.
BrightSource
BrightSource Principal, Steve Lewis has participated in numerous gas price negotiations. He is well qualified and experienced to help you prepare for the best possible outcome – particularly based on his extensive knowledge of the WA gas market and contract pricing. In addition, he can assist with detailed preparation for negotiations, up to and including conducting the negotiations for clients. Having an expert consultant supporting the preparation, organising and negotiating process will deliver an optimum outcome for the client.
1. See http://www.gastrading.com.au/spot-market/historical-prices-and-volume
2. https://www.dmp.wa.gov.au/About-Us-Careers/Latest-Statistics-Release-4081.aspx
3. A current large gas user missed the ‘notice window’ under the gas contract and was denied an opportunity re-negotiate price by the supplier