Historically, LNG has been sold through long-term contracts with limited flexibility in volume and price. LNG trade patterns have evolved significantly, adding to increased sales of multiple cargoes on the spot market, brokered trades and speculative trading positions being taken up by non-traditional players.
Buyers in the Asia-Pacific region are keen to secure supply for local markets, while Australian producers, particularly subsidiaries of foreign headquartered groups, are under pressure to sell at competitive prices.
From a transfer pricing perspective, the Australian Taxation Office (ATO) has placed increased scrutiny on the commerciality of arrangements, arm’s length outcomes and profit allocations between Australian taxpayers and their international related parties (e.g. marketing and trading hubs).
This extended abstract covers:
factors that could impact on the selection of a price index and the slope or gradient to be applied in pricing formulae;
blended pricing based on an average of different indices, and why pooling and trading may make commercial sense, although revenue authorities may not look favourably upon it;
the importance of the contractual terms, the market situation and the other commercial contract conditions on the pricing of related-party LNG sales; and,
the value in potentially seeking an advanced pricing agreement in a related party LNG pricing context, given the significance of the transactions.
Given the practical and commercial challenges facing the industry and with several projects commencing production in the relatively near future, this is very topical. The authors use case studies to illustrate the key concepts.
When a Master Dies: Speculation and Asset Float
