A long-term LNG Sale and Purchase Agreement is the master contract that governs the sale of liquefied natural gas between a producer and a buyer, and its key terms cover volume commitments, pricing formulas, delivery and shipping risk, force majeure, default remedies, liability caps, regulatory conditions, sanctions, and increasingly methane emissions. These contracts routinely run 15 to 25 years and underpin billions of dollars of project financing, which is why every clause carries real commercial weight. Spot and short-term deals have grown as the market matured, but the long-term SPA remains the backbone of global LNG trade.
The terms below are the ones that determine who pays what, who bears which risk, and what happens when something goes wrong.
Annual Contract Quantity and Take-or-Pay
The commercial core of the agreement is the Annual Contract Quantity (ACQ): the total volume of LNG the seller must deliver and the buyer must take in a given contract year.1Department of Energy. Understanding Natural Gas and LNG Options Volume is measured in energy units, usually millions of British Thermal Units (MMBtu) or million tonnes per annum (MTPA), because what matters commercially is the energy content of the gas.
Virtually every long-term SPA pairs the ACQ with a take-or-pay clause. If the buyer lifts less than a specified minimum percentage of the ACQ in a given year, it still owes payment for that minimum. The mechanism protects the seller’s revenue and, by extension, the project financing that built the liquefaction plant. The contract also typically sets a Downward Quantity Tolerance (DQT), a narrow band below the full ACQ that the buyer can fall short of without triggering take-or-pay consequences.1Department of Energy. Understanding Natural Gas and LNG Options
Make-Up Rights
Take-or-pay is not simply money thrown away. After paying for gas it did not physically receive, the buyer usually earns a make-up right: the ability to take an equivalent quantity of LNG in a later year, paying only the difference between the original contract price and the price when the make-up cargo is actually lifted. Sellers resist making this right absolute. Make-up volumes are commonly capped by a deadline (use it within a set number of years) and by seller capacity, often phrased as a “reasonable endeavours” obligation.
Pricing Formulas and Price Review
Pricing varies by region. In Asia-Pacific, prices have traditionally been indexed to crude benchmarks such as Brent or the Japan Customs-cleared Crude (JCC). In Europe, oil-linked formulas have largely given way to gas-hub pricing tied to benchmarks like the Dutch Title Transfer Facility (TTF). U.S. export contracts typically link the LNG price to the Henry Hub natural gas index, often expressed as a percentage of Henry Hub plus a fixed liquefaction fee per MMBtu.2U.S. Energy Information Administration. U.S. LNG Developers Sign Highest Volume of Sale and Purchase Contracts Since 2022
Long-term contracts frequently include a price review or reopener clause. Either party can request a renegotiation of the formula if market conditions have shifted substantially since signing. The trigger might be an objective threshold (the reference price has moved more than a set percentage) or a broader standard such as the buyer no longer being able to maintain a reasonable marketing margin. If the parties cannot agree on a revised formula, the dispute usually goes to arbitration. Price reviews are one of the most litigated provisions in the industry, because even a small per-unit adjustment compounds over millions of tonnes and many years.
Delivery Model: FOB or DAP
Two shipping structures dominate, and the choice between them determines who controls the vessel and who bears the risk of loss in transit.
- Free on Board (FOB). The seller delivers the LNG onto a vessel at the loading port. Once the cargo is on board, risk and ownership pass to the buyer, who arranges and pays for shipping. This gives the buyer flexibility to choose its own vessels and potentially divert cargoes.
- Delivered at Place (DAP). The seller retains risk and ownership throughout the voyage and delivers the LNG to the buyer’s receiving terminal. The buyer’s obligation begins when the cargo arrives. The structure is sometimes still called by the older Incoterms label “Delivered Ex-Ship” (DES), which was formally replaced by DAP in 2011.
The choice has cascading effects. It determines which party vets and insures the vessel, who bears the cost of delay, how boil-off losses are allocated, and how destination restrictions and emissions tracking obligations fall. Those downstream consequences show up in the clauses that follow.
Shipping Terms: Boil-Off, Laytime, Demurrage
LNG is stored at roughly negative 162 degrees Celsius. Even with heavy insulation, a small amount continuously vaporizes during transit in a process known as boil-off. Modern carriers use this boil-off gas as fuel for propulsion, reducing waste and the need for separate bunkers. The SPA must specify how boil-off is measured and allocated, because it directly affects the volume of liquid cargo available at discharge. Under FOB, the buyer owns the cargo in transit and bears the boil-off loss. Under DAP, the seller absorbs it until delivery.
When a vessel arrives, it issues a Notice of Readiness that starts the clock on laytime, the contractual window within which the terminal must complete loading or unloading. If the terminal exceeds the allowed laytime, the responsible party owes demurrage, a daily fee compensating the vessel owner for the delay.3U.S. Securities and Exchange Commission. LNG Sale and Purchase Agreement – Section: 7.13 LNG Tanker Not Ready for LNG Loading; Excess Laytime Demurrage rates track the charter rate for the specific vessel and swing with market conditions.
Vessel vetting is a separate operational condition built into the contract. Before any ship can call at a loading or receiving terminal, it must pass checks confirming it meets the port’s safety requirements and is physically compatible with the terminal’s loading arms and manifold connections. The SPA sets vessel size limits, and many projects are designed around specific carrier classes.
Destination Restrictions and Diversion Rights
Older SPAs commonly contained strict destination clauses preventing the buyer from reselling or redirecting a cargo away from the named terminal. Sellers used these restrictions to protect pricing power across regional markets. Regulators have pushed back.
EU competition authorities view destination restrictions in FOB contracts as potentially anticompetitive because they discourage movement of cargoes between EU member states. Japan’s Fair Trade Commission has taken a similar position, finding that FOB destination restrictions are “highly likely to be anti-competitive” because the buyer already owns the cargo. Both regulators are more tolerant of destination provisions in DAP contracts, where the seller still owns the LNG in transit and has legitimate logistical reasons to control routing.
The practical trend is toward diversion flexibility. Many modern SPAs let the buyer redirect cargoes to alternative terminals, subject to conditions: the buyer bears additional shipping costs, confirms vessel compatibility with the alternate terminal, and does not disrupt the annual delivery schedule. The flexibility has become a valuable commercial tool, letting buyers capture regional price arbitrage.
Force Majeure
Force majeure clauses excuse performance when events beyond a party’s control prevent delivery or receipt. Typical qualifying events include natural disasters, wars, government embargoes, and major equipment failures at the liquefaction plant or receiving terminal. The event must genuinely prevent performance, not merely make it more expensive.
LNG SPAs deliberately exclude market price swings, economic hardship, and general business difficulties. A seller cannot declare force majeure because spot prices have risen above the contract price and it would rather sell on the open market. The clause is for true operational impossibility, and the list of qualifying events is negotiated carefully.
When force majeure is triggered, the affected party’s delivery or acceptance obligations are suspended for the duration of the event. Most contracts require prompt notice and reasonable efforts to resume performance. If the event persists beyond a threshold period, often two to three years, either party may have the right to terminate.
Seller Default and Liquidated Damages
The seller’s mirror of take-or-pay is a deliver-or-pay mechanism. When the seller fails to deliver a scheduled cargo outside permitted tolerances or force majeure, the buyer is entitled to liquidated damages. These are typically calculated as the contract price multiplied by the shortfall quantity, capped at a percentage of what the buyer would have paid. The purpose is to compensate the buyer for the cost of sourcing replacement supply on the spot market, which during tight supply can be dramatically more expensive than the contract price.
In less liquid markets where spot replacement may not be available, some SPAs instead require the buyer to mitigate losses by procuring alternative supply (LNG, pipeline gas, or even electricity) and then recover the actual cost differential. If the SPA contains no liquidated damages formula, the seller faces open-ended liability for provable losses under the governing law, which is why most sellers prefer a defined formula.
Liability Caps, Governing Law, and Arbitration
LNG SPAs almost universally exclude consequential damages. Neither party can sue for lost profits, reputational harm, or downstream business disruption caused by the other’s breach. The contracts also typically cap total liability at a fixed amount or a percentage of annual contract value. These caps reflect a commercial bargain: both sides accept limited remedies in exchange for the predictability needed to finance and operate multi-billion-dollar projects.
Governing law is usually English or New York law. Both have deep bodies of commercial precedent and are perceived as politically neutral by parties from different countries. The choice matters most when a tribunal must interpret ambiguous language or determine whether a liquidated damages clause is enforceable.
Disputes that cannot be resolved through negotiation almost always go to international arbitration rather than national courts. The most common institutional frameworks are the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA). The arbitral seat, which determines the procedural law governing the arbitration, is typically London, Paris, or Singapore.
A growing practice is to split the dispute resolution clause so that technical disagreements (quality measurements, boil-off calculations, whether a force majeure event actually occurred) go to an independent technical expert rather than a full arbitral tribunal. Expert determination is faster, cheaper, and puts the decision in the hands of someone who understands the engineering. Broader commercial or legal disputes still go to arbitration.
Conditions Precedent and Regulatory Approvals
Most LNG SPAs are signed before the exporting project has all of its permits. The contract’s effectiveness is tied to conditions precedent, including regulatory approvals, construction milestones, and credit arrangements. Neither party is obligated to perform until those conditions are satisfied.
For U.S. export projects, two separate federal authorizations are required. The Federal Energy Regulatory Commission (FERC) authorizes siting and construction of onshore and near-shore LNG export facilities under Section 3 of the Natural Gas Act.4Federal Energy Regulatory Commission. LNG The Department of Energy (DOE) separately authorizes the export of the gas itself. For exports to countries with a U.S. free trade agreement, DOE authorization is essentially automatic. For non-FTA countries, the DOE must find that the export is “consistent with the public interest” before granting approval.5Federal Register. Policy Statement Regarding Long-Term Authorizations To Export Natural Gas to Non-Free Trade Agreement Countries Import-side approvals vary by jurisdiction and can include environmental permits, terminal operating licenses, and customs authorizations.
Sanctions Compliance
Every modern SPA includes representations that neither party is subject to sanctions imposed by the U.S. Treasury’s Office of Foreign Assets Control (OFAC), the European Union, or other relevant authorities. These clauses typically require prompt notice if a party’s sanctions status changes.
These provisions are not boilerplate. A seller that delivers to a sanctioned entity, or a buyer that pays through a sanctioned bank, can face asset freezes and criminal prosecution. The practical effect is that sanctions clauses can override other obligations in the contract. If a counterparty becomes sanctioned midway through a 20-year deal, the other side may have the right to suspend or terminate deliveries regardless of what the rest of the contract says.
Methane Intensity and EU Compliance Obligations
A newer layer of contractual complexity involves methane and carbon emissions. Some buyers in Europe and East Asia have contracted for “carbon-neutral” cargoes where the seller purchases and retires offsets equal to the cargo’s emissions. Scope varies: some cover only production-to-delivery, others attempt to offset the full lifecycle from wellhead to final combustion.
The EU Methane Regulation is converting voluntary commitments into mandatory requirements. Starting in May 2025, importers of LNG into the EU must report qualitative information on the origin and emissions monitoring of their cargoes. By January 2027, importers must demonstrate that the gas was produced under monitoring, reporting, and verification standards equivalent to EU domestic requirements. By August 2030, imported LNG must meet a maximum methane intensity limit set by the European Commission.6European Commission. Methane Emissions The obligations apply to all contracts signed or renewed after August 2024, and the regulation expects “reasonable efforts” to apply them to pre-existing contracts as well.
The impact on SPA drafting is direct. Contracts with European buyers now need provisions requiring the seller to share cargo-specific methane intensity data, conduct supply-chain emissions analyses, and cooperate with the buyer’s verification obligations. The delivery model matters again: in FOB contracts the buyer controls the vessel and must account for shipping emissions, while in DAP contracts the seller handles that segment.
Credit Support and Gas Quality Specifications
Before signing, the buyer must demonstrate it can meet multi-million-dollar payment obligations, typically through a letter of credit from an investment-grade bank or a parent company guarantee. The seller provides detailed plant specifications so the buyer can confirm vessel compatibility with the loading terminal.
Gas quality specifications are documented in granular detail: heating value ranges, chemical composition limits for impurities such as hydrogen sulfide, and allowable quantity tolerances for each cargo. Off-specification gas can be rejected entirely or accepted at a discounted price, depending on the severity of the deviation and the contract terms.1Department of Energy. Understanding Natural Gas and LNG Options
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