Oil, Gas & Energy Law Intelligence

use. This mechanism is called “net-back replacement value-based” (NBRV) pricing andit appears on competitive markets with an inter-fuel competition. NBRV pricing providesa maximum marketable price for gas producers/exporters (higher than the cost-plus)and an appropriate, affordable price (lower than the prices of available alternative fuels)for the customer. Regular adaptation of the NBRV-based price within mutually agreedcontractual mechanisms (price reviews) supports its competitive level. Thus, indexationwithin NBRV pricing is an investment pricing mechanism within competitive markets. Itresults in a “fair’ price level for the stage of intensive market development.Contrary to both “investment” pricing mechanisms, spot pricing is a “trade” pricingmechanism. It is not a long-term, but a short-term mechanism, appropriate for tradeoperations, but it is not welcome for project financing. Project financiers would neveraccept short term pricing (spot) if long term pricing (NBRV with indexation) is available.Only under external pressure they will give up financing tools based on long-termcontract with NBRV and price indexation and will accept, say, hub-based pricing withspot transactions 39 .The evolution of contractual structures and pricing mechanisms is presented atFigure 4. Each new combination (pair) of contractual structure and pricing mechanismattributed to it appears only when the preconditions for them are available on themarket with, first and most, an adequate development of infrastructure. The growinglevel of diversification brings gas markets from one stage of development to anotherand creates preconditions to move to a higher level of competition on the market.Though there is one general principle: new market structures appears in addition toexisting ones and not instead of them, just the contractual mix becomes morecompetitive from stage to stage (Figure 4).39 That was the case with Ormen Lange project (Norwegian shelf, North sea), when such “external pressure” wasprovided by the CEC, according to senior management of Statoil, and the fact that all supplies were aimed at theUK market with NBP (National Balancing Point) as its single pricing platform. By the way, according to myknowledge, this project is the only upstream oil & gas project financed and developed without LTC and based onspot prices.34