Prices crude LPG hold would be purchased by the market
Prices crude LPG hold would be purchased by the market . since different types of buyers driven by different economic incentives. While LP is produced as illustrated by the crude oil, there is clearly a distinct LPG market, fluctuating demand in the spot market The traditional LPG pricing mechanism in use in the Arabian Gulf the world’s primary supplier of LPG, did not factor in this notion of a distinct LPG market. LPG prices were indexed sole to Arab light crude oil and the producing nations were free to adjust ratio of LPG expressed as a percent of cost of the price of Arab light crude oil) while remaining thermal equivalent unrestricted by the pricing mechanism.
An important as of this cheme was the right of the buyer to”phase out” of the contract. If the price ratio exceeded specified levels or the buyer and seller had not agreed on the appropriate price, the buyer was entitled to gradually decrease its quantity commitment over a suitable period- usually nine months. However, only one of the two scenarios above would be incorporated into the sales contract. The LPG pricing scheme was dramatically altered in early 1992 by the Saudi state-owned SAMAREC(the Saudi Arabian Marketing and Refining Company, now dissolved and taken over by Saudi Aramco).
SAMAREC, the world’s largest marketer of LPG, announced a new pricing mechanism that was designed to recognize the market for LPG and capture some of the price differential in spot LPG sales. The new formula se the base LPG price for a given month at 90 percent of the FoB price for the thermal equivalent of rab light crude oil. To incorporate the spot market, SAMAREC issued a public tender and completed a sale, thereby establishing a pot price. If this spot price differed from the previously determined base price by more than per ton, 50 percent of the differential was adjusted contract price. Furthermore reflected in an new uyers no longer had a phase-out option within the pricing formula.
While ADNOC has not specifically integrated this ing formula into its standard contracts, the prices resultin impact the ADNOC price, ADNOC’s standard LPG contract It is FoB sales includes a mechanism that determines priees by refe to”arm’s length prices in the Arabian Gulf for similar prod sectors, (in terms of quantity and quality) sold pursuant to similar term Thus, assuming otherwise similar terms, the ADNOC formula mechan includes the SAMAREC price as a reference, and as recognizes the LPG market. ADNOC’s LPG contracts also contain com a modified pay provision dealing with failure to lift in certain circumstances.
In essence, the buyer is required to pay respon when, through no fault of the seller or force majeure, the buyer fails the risk to lift(take delivery of the contracted quantities of LPG. LNG Prices While LNG price formula have responded to markets, this has largely involved guarantees of demand rather than price modifications.
As mentioned earlier, continued, consistent sales are producers most important concern for producers. Thus, they cannot be subject to the uncertainties of market demand decisions particular and require a contractual commitment of a specified minimum volume in order to ensure the required levels of cash flow which are particularly important for projects that require commercial financing. This type of contractual commitment is referred to as take-or-pay” (ie refer indict minimum quantity, even if buyers do not take delivery of the quantity, they must pay for i). Beyond this minimum buyers are generally entitled to a degree of quantity nexibility as discussed above, but the take-or-pay obligation is of paramount importance to producers as it effectively shifts demand risk to the purchaser of LNG.