Esso fails to obtain a price review in ESB sales contract
A recent judgement against Esso Exploration & Production UK raises questions both about the development of price clauses in gas purchase contracts, and about the definition of a price. A judge in London threw out Esso E&P’s claim for a price review, which was based on the divergence of more than 15% between the contract price and current spot market values, as determined by a comparator — in this case the Heren price for one-year gas at Bacton.
Esso was the claimant in a dispute with its customer, ESB, the Irish Electricity Supply Board, concerning the application of a price review clause. The contract is for a relatively small volume of gas to be delivered to ESB for 15 years from 1st October 1999.
The contract was signed in late November 1997. Under the agreement, the Energy Charge (commodity price) was set at a base level (P0) calculated every six months by reference to four markers. Each marker was averaged over a twelve-month period with a three-month lag:
1. The spot price of gasoil (30%).
2. The spot price of low sulphur fuel oil (30%).
3. The spot price of gas (30%).
4. The Irish wholesale price index (10%).
In November 2002 Esso wrote to ESB giving notice that it required a review of the Energy Charge, which it said had fallen to 85% or less than a comparator.
Esso, the judge said, had “determined the value of the Comparator by taking the price quoted in The Heren Report for delivery of a fixed quantity of natural gas to be delivered daily at the Bacton terminal for a period of a year (which it considered to be a generally recognised base market indicator) and adjusting it to reflect the particular terms of the contract with ESB.”
ESB rejected the application for a price review on the grounds that the comparator was for gas to be delivered over twelve months rather than on prices actually paid for gas to be supplied under long-term contracts. Esso tried to have the question referred to arbitration, but was prevented from doing so because, under the terms of the agreement, arbitration could not take place unless the parties had failed to agree on a properly notified price review.
Dispute turned on meaning of “comparator”
The argument in court turned on the definition of the comparator. Esso argued that in the absence of clear evidence of prices being paid for long-term gas supplied to power stations it was necessary to improvise on the basis of prices being paid for short term gas. ESB countered that the definition of the comparator was quite specific, and, there being “no market for long term supplies”, the comparator did not exist.
Esso argued that due to the confidentiality clauses in longterm contracts, it was impossible to refer with certainty to any exact comparators. But the judge said that both parties had known this when they negotiated the original agreement. In any case, he said, the market for long-term gas is necessarily very small.
A long-term gas price, the judge said, reflected many factors, including the current prompt price, forward prices, the parties’ perceptions of the likely future movement of prices, and the particular terms of the contract, as well as their relative negotiating strengths. There was no reason to regard short-term prices as offering a more accurate value.
Dismissing the claim, the judge said: “I am satisfied that the Comparator ... is the actual market price of natural gas currently being supplied under comparable contracts rather than a notional market price derived from the prices for spot or shortterm deliveries.
It is apparent that in giving its Price Review Notice Esso was proceeding under the mistaken impression that the Comparator was a notional market price and that it was not satisfied, nor, as far as one can tell from the notice, did it have reasonable grounds for being satisfied, that the Energy Charge had diverged to the required extent from the true Comparator.”
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