Abstract
The LNG price formula is one of the most critical factors in LNG contract negotiations. When buyers and sellers
argue for different formulas during negotiations, there is no mutually agreeable way to compare these formulas
with different shapes into the evaluation. Therefore, the establishment of a metric for valuing LNG formulas will
lead to more efficient negotiations. In this paper, we suggest a financial engineering approach, proposing a
methodology for valuing LNG price formulas utilizing the “market value” concept. We observed that LNG
prices determined by formulas linked with crude oil prices can be replicated by crude oil derivatives and define
the market value of these derivatives as the “market value of LNG price formulas”. Furthermore, we show that
this methodology can also be applied to the formulas indexed to natural gas prices (e.g. Henry Hub). Our proposal
would enable quantitative comparison of different price formulas according to a “market value” scale defined. It
would also enable the generation of alternative price formulas that have equivalent “market value” but different
shapes or indexes.
