Long term LNG contracts in Asia have historically been linked to prevailing crude oil prices, and there are typically 3 pieces to the contract calculation: the oil price, the slope and the constant.

The calculation starts with an oil price reference benchmark, the one most commonly used is the JCC (Japanese Crude Cocktail), which represents the average monthly of a basket of carious crude oils imported into Japan. The JCC typically moves in line with other global crude benchmarks.

The second contractual price in the LNG price derivation is the negotiated factor, known as the “price slope”. Slope essentially defines the relationship between the oil and gas prices, and is then multiplied by the JCC. On average, 1 mmbtu of gas has about 16.67% of the energy content of a barrel of oil (i.e. the 6-to-1 heat equivalent parity). Contract slope is typically expressed in percentage terms, thus if the heat equivalent parity were used, the slope would be 16.67%. Contract slopes are typically slightly less than 16.67%, usually around 14%-15%, but they could be higher if the buyer were willing to pay a premium over the heat equivalent oil price.

To further add complexity some contracts will have varying slope percentages used at different oil price levels. There can be 4 basic forms: the simplest is the straight-line constant slope that exposes both the buyer and seller to adverse price movements. A second type is the s-curve, which will have a flatter slope at low oil prices to protect the seller and a flatter slope at high oil prices to protect the buyer. The other two types are variations on the s-curve, where either only the seller has some protection (a floor) or only the buyer has protection (a ceiling).

The final piece is the constant term, which generally represents a fixed price element that is independent of oil price movements. Most LNG contracts will include a modest constant, typically less than $1 mmbtu, which generally bears some implicit relationship to shipping costs