Claimants and Respondent were parties to a long-term gas sales and purchase contract. The contract provided for price adjustments by way of a price formula and a price review. The price formula indexed the gas price to that of two competing fuels. The price review provisions allowed the parties to request that the price be adapted to varying market conditions in the buyer's market. Fifteen years after the contract was made, Claimant asked that the gas price be reduced and the price formula modified in order to reflect economic changes in the buyers' market. At the same time, Respondent asked for the contractual price to be increased. As no amicable agreement could be reached, Claimants referred the dispute to arbitration. The arbitral tribunal was required to determine whether the conditions for a price review according to the contract were fulfilled.

The contract underlying this dispute is the same as that underlying the dispute in case 9812.

'2.2 The price provisions of the [Contract]

86. The [Contract] covers the sale of certain volumes of natural gas produced from the [gas field] which are to be delivered to the Buyer in daily quantities at [location]. The price to be paid by the Buyers for any delivery is the price applicable at the delivery date according to the price provisions contained in Article 6.1 to 6.4 [Contract]. The contract price (P) is to be calculated according to a price formula combining two elements: a base price (P0) and a specific price element to be added or deducted from the base price. This specific price element is calculated for each quarter on the basis of the development of the prices for two competing sources of energy-light and heavy fuels oils.

87. The base price (P0) is determined in the contract as a specific amount applicable to all quantities of gas delivered to the Buyers. Generally speaking, the level of the base price can be seen as reflecting an average of all differently priced market opportunities available to the Buyers in the various segments of the gas market in [Buyers' State] at the time of conclusion of the [Contract]. Consequently, there is no direct relation between the base price and the prices obtained by the Buyers when reselling the case [sic] in the various customer segments.

88. According to Article 6.4 [Contract], the contract price (P) is a combination of P0 and a price element indexed to oil price developments. The specific price element to be added or subtracted from the base price (P0) when determining the contract price (P) for deliveries of gas in a particular quarter, is to be calculated quarterly as set out in Article 6.4 [Contract] on the basis of price quotations for light heating oil ("LHO") and heavy fuel oil ("HFO") published by the [neighbouring State] Bureau of Statistics. The purpose of this indexation of the contract price was to reflect any increase or decrease of the prices for the major alternate energies against which natural gas was competing in the energy market in [Buyers' State]. This would ensure that the gas delivered to the Buyers would stay competitive in times of decline in oil prices, and that the Seller would benefit from higher gas prices in times of increase of the prices for the competing fuel oils and thus receive the highest price obtainable under existing energy market conditions, at least on a medium-term basis.

89. The [Contract] was concluded in . . . The price provisions (Article 6.1 to 6.4 [Contract]) have since then been amended several times by agreement between the Parties . . .

90. The [Contract] is a long-term gas sales contract, extending from 1986 and up to and potentially beyond 2026. In view of the long-term commitments of the Parties and in order to facilitate appropriate adjustments to counter unexpected economic developments not reflected in the price provision and which could distort the long-term viability of the [Contract], the Parties agreed to supplement the price provisions of Article 6.1 to 6.4 [Contract] by a mechanism for review of the price provisions at defined intervals. The relevant provisions on such reviews are set out in Article 6.10 [Contract].

91. According to Article 6.10(b) [Contract] the general rule is that each Party is entitled to request a review of the price provisions with effect as of 1 October 1995 and every three years thereafter. As provided in Article 6.10(a) [Contract], at such review each of the Parties is entitled to an adjustment of the price provisions of Article 6.1 to 6.4 [Contract] if, generally speaking, "the economic circumstances in the country of the Buyer . . . should change significantly compared to what is reflected in the price provisions of Article 6.1 to 6.4". The adjustment of the price provisions to be made shall be "reflecting such changes, in particular the value of Natural Gas in the end user market of the Buyer". In the opinion of the Arbitral Tribunal, the word "changes" in the foregoing quotation must be understood as also referring to "the value of Natural Gas". Consequently, any change of the value of natural gas not reflected in the existing price provisions should be taken into account, in particular in connection with the price review.

92. This arbitration relates to a request for price review with effective date 1 October 2001, and the request is based on changes in the economic circumstances in [Buyers' State] during the period 1 October 1998 to 1 October 2001.

93. Article 6.10 [Contract] reads as follows:

94. 6.10 Price Review

(a) If the economic circumstances in the country of the Buyer, which are beyond the control of the Parties, should change significantly compared to what is reflected in the prevailing price provisions under Articles 6.1-6.4 hereof, then each Party shall be entitled to an adjustment of the price provisions under Article 6.1-6.4 hereof, reflecting such change, in particular the value of Natural Gas in the end user market of the Buyer, as such value can be obtained by a prudent and efficient gas company.

In any case the price provisions hereunder shall allow the Buyer to economically market the Processed Gas delivered hereunder in the market of the Buyer in competition with all competing sources of energy in the end user market, always assuming sound marketing practices and efficient operations on the part of the Buyer.

(b) Either Party shall be entitled to request a review of the price provisions under Articles 6.1-6.4 hereof for the first time with effect of 1 April 1992, or earlier if necessary in order to perform a price review six (6) months prior to start of deliveries, for the second time with effect as of 1 October 1995, and thereafter with effect of 1 October every three (3) years after 1 October 1995. In addition each Party shall be entitled to request a review of the price provisions under Article 6.1-6.4 hereof once within each of such three-year interval with effect from the first day of the month next following the request for price review, provided that the total number of such additional requests shall be limited to three (3) for each Party during the term of this Agreement. Any request for price review shall be made in writing substantiating the reasons for it and shall be made before the date of effectiveness of such price review and shall be ineffective if received by the other Party after such date.

Following a request for price review under this Article, the Parties shall meet to examine whether or not an adjustment of the said price provisions is justified.

(c) Each Party shall provide all necessary information to substantiate its own claim. No Party shall be required to disclose any business secrets nor to provide such information as the other Party may need to substantiate its claim.

(d) Failing agreement within a period of one hundred and twenty (120) days from the request for review, either Party may refer such matter to arbitration under the provisions of Article 15 hereof for decision in accordance with the criteria contained in lit (a) above.

(e) If and as long as, with respect to any price review hereunder, no agreement has been reached and no arbitrational award has been made and taken effect, this Agreement shall remain in full force and effect, and the rights and obligations of the Parties, including, without limitations, the obligations of the Seller to sell and deliver and the obligations of the Buyer to take and pay for at the applicable price Processed Gas as provided for under this Agreement, shall remain applicable unchanged and unadjusted.

(f) If the rights under this Article 6.10 are exercised by the Buyer against the Seller they shall also be exercised against all other Associated Sellers under their [Contracts] with the Buyer as of the same date.

If any rights under Article 6.10 lit. (b), second sentence are exercised by any of the Associate Sellers as of a certain date, then the Seller shall not be permitted to exercise such rights as of any other date and an additional request made by one or more Associated Sellers, but not by the Seller shall be counted also against the number of additional requests allowed for the Seller. All negotiations under this Article 6.10 shall be conducted by the Buyer and the Seller jointly with all other associated Sellers by or against whom a price review under their [Contracts] with the Buyer is requested.

2.3 The basis for Claimants' claim under Article 6.10 (a) [Contract]

95. The Arbitral Tribunal notes that the key provision in relation to this arbitration is Article 6.10(a) [Contract]. During the arbitral proceedings Claimants and Respondent have in important regards expressed conflicting views as to the scope, meaning and interpretation of the provisions therein. Accordingly, the Arbitral Tribunal considers these issues in order to establish the proper basis for deciding whether or not claims put forward by Claimants are to be approved.

2.3.1 The structure of Article 6.10(a) [Contract]

96. Article 6.10(a) [Contract] contains two sub-paragraphs, both being relevant in the present arbitration.

97. The first sub-paragraph of [Contract] Article 6.10(a) which appears to set out the general rules, first defines the economic circumstances which will give each of the Parties a right to adjustment of the price provisions contained in Article 6.1 to 6.4 [Contract]. Subsequently, this clause sets out the principles according to which any adjustment of the price provisions shall be implemented.

98. A right to adjustment of the price provisions arises "If the economic circumstances in the country of the Buyer, which are beyond the control of the Parties, should change significantly compare to what is reflected in the prevailing price provisions under Article 6.1-6.4". An essential part of this provision is the reference to circumstances "reflected in the prevailing price provisions". This expression comprises, in other words, circumstances already taken into account when the contract price (P) for the gas delivered is calculated. Examples of such circumstances are changes in the prices quotations for heavy and light fuel oils to be given effect according to the oil indexation provisions of Article 6.4 [Contract]. Consequently, the condition for an adjustment of the price provisions is that there have taken place changes in other circumstances pertaining to the gas market in [Buyers' State] with the consequence that, during the price review period, contract prices as calculated according to the prevailing [Contract] price provisions have developed in a different manner than the value of Natural Gas in the [Buyers' State] market. The Arbitral Tribunal considers that this view is supported by the language of the provision. According to the latter half of the first sub-paragraph of Article 6.10(a) [Contract] there shall be made "an adjustment of the price provisions under [Contract] Article 6.1-6.4 hereof, reflecting such changes, in particular the value of Natural Gas in the end user market of the Buyer, as such value can be obtained by a prudent and efficient gas company".

99. The general rule of the latter half of Article 6.10(a) first sub-paragraph of the [Contract], that the price provisions shall be adjusted so as to "reflecting" the relevant changes, is rather broadly worded and leaves some room for discretion as to implementation in particular cases. This follows from the fact that this principle is supplemented by a general guideline to the effect that "in particular the value of Natural Gas in the end user market of the Buyer" shall be reflected. In this context the term "Natural Gas" refers to natural gas in general, including but not limited to the "Processed Gas" delivered under the [Contract]. This means that the adjustment to be made should "in particular" have the effect to reestablish a reasonable difference between [Contract] prices and market values. This does not mean, however, that "the value of Natural Gas" is the only relevant consideration when an adjustment of the price provisions is to be made. The Arbitral Tribunal considers that the general purpose of price review provisions such as Article 6.10 [Contract] and the like provisions in long-term contracts, is to facilitate appropriate adjustments to counter unexpected economic developments not reflected in the price provision or which could distort the long-term viability of the [Contract].

100. The first sub-paragraph of Article 6.10(a) [Contract] is followed or supplemented by a provision in Article 6.10(a) second sub-paragraph reading:

In any case the price provisions hereunder shall allow the Buyer to economically market the Processed Gas delivered hereunder in the market of the Buyer in competition with all competing sources of energy in the end user market, always assuming sound marketing practices and efficient operations on the part of the Buyer.

101. This clause is regarded by both Parties as a safeguard for the benefit of the Buyer. The wording of this provision was the subject of particular negotiations between the Parties when the [Contract] was elaborated, and the words "in any case" were inserted at the request of the Buyer. In contrast to the first sub-paragraph of Article 6.10(a) [Contract], the key element of this provision is not referring to any difference between the contract price under the prevailing price provisions and the "value of Natural Gas", thus natural gas in general, but to the difference between the contract price so calculated and the prices which would "allow the Buyer to economically market the Processed Gas in the end user market". The term "Processed Gas" covers the gas delivered under the [Contract]. However, both the first and the second sub-paragraph are referring to the situation in "the end user market of the Buyer", and whether there exists any difference between the meaning of the two provisions will depend i.a. on what is the proper interpretation of the expression "the value of Natural Gas" (see below paragraph V/B/2.3.3).

102. Claimants have alleged that the second sub-paragraph of Article 6.10(a) [Contract] constitutes a separate basis for a claim for adjustment of the price provisions in Article 6.1 to 6.4 [Contract], while Respondent has maintained that this provision "is not an independent basis for a price review" . . . The Arbitral Tribunal considers that it is not necessary for the purposes of the present arbitration to decide this issue. In the opinion of the Arbitral Tribunal, the second sub-paragraph is at any rate relevant in this arbitration and should be taken into account in several contexts.

103. One reason is that this provision is referring explicitly to the competition between "the Processed Gas" and "all competing sources of energy", and thereby also to the price relations between the Processed Gas and such other energies. Nevertheless, the Parties are in disagreement as to whether electricity generally available in the market may be a "competing source of energy" in relation to gas delivered for electricity and heat production. The Arbitral Tribunal deals with this question below in paragraph V/B/2.3.3.2.

104. Furthermore, the second sub-paragraph of Article 6.10(a) [Contract] is relevant because, by requiring that the price provisions "shall allow Buyer to economically market the Processed Gas . . . in the market of the Buyer in competition with all competing sources of energy", this provision also gives some additional guidance as to how to adjust the prevailing price provisions according to the first sub-paragraph of Article 6.10(a) in order to reflect the relevant changes in the [Buyers' State] gas market.

2.3.2 The relevant changes in economic circumstances

105. According to the agreement between the Parties, the present price review with effective date 1 October 2001 shall be based on changes in the economic circumstances within the three years period from 1 October 1998 to October 2001 . . .

106. Respondent has alleged that Claimants have also relied on certain events or changes relevant for the value of natural gas and the situation in the gas and energy market which actually took place prior to 1 October 1998, and argues that such events and changes in principle are without relevancy in the present price review. In the view of the Arbitral Tribunal, however, the appropriate approach is not only to consider the originating event of changes in economic circumstances. The main question is whether such an event or change has nevertheless had impacts or consequences inducing or influencing the extent of changes in the economic circumstances which were prevailing in [Buyers' State] during the three years period for this price review, and which are not reflected in the price provisions of Article 6.1 to 6.4 [Contract] as applicable during the price review period. If this should be the case, the economic circumstances in [Buyers' State] have changed during the price review period compared to what is reflected in the then prevailing price provisions, and one condition for a right to adjustment of the price provisions set out in Article 6.10(a) [Contract] is met.

107. Article 6.10(a) first sub-paragraph of the [Contract] refers to changes in "the economic circumstances of the country of the Buyer", thus [Buyers' State]. However, both Parties have been aware that Claimants (the Buyer) are reselling [Contract] gas directly and indirectly only into [part of that State]. . . . During the arbitral proceedings the question has been raised if the economic changes in all of [Buyers' State] or only the changes in [the part concerned] amount to relevant economic changes according to Article 6.10(a) first sub-paragraph of the [Contract]. However, the Arbitral Tribunal considers that the wording of the relevant provision is clear, and that documentation of economic changes in [Buyers' State] as a whole would suffice to meet the requirement for a price review.

108. Another matter is that such relevant changes shall be reflected by adjustment of the prevailing price provisions in accordance with their impact on the value of natural gas and the opportunity to economically marketing of the [Contract] gas in competition with other sources of energy in "the end user market" of the Buyer. Both the first and second sub-paragraph of [Contract] Article 6.10(a) use the expression "the end user market" in singular form. In these contexts, consequently, it is the situation in the gas market of the Buyer in the [part of the State in which gas is sold], as determined on the basis of the various customer segments thereof which will be relevant. However, the Arbitral Tribunal has no particular reason to believe that the gas market situation in the [part] supplied by the Buyer differs materially from that in [Buyers' State] as a whole.

109. According to Article 6.10(a) first sub-paragraph of the [Contract], the basis for adjustment of the price provisions are only changes in economic circumstances "which are beyond the control of the Parties". Typical examples of circumstances outside the sphere of influence of any of the Parties are various government measures such as [new legislation] and the appearance of new competitors or competing energies in the market. Excluded are circumstances influenced or self-inflicted by any of the Parties, e.g. resulting from purchases by the Buyer of additional gas supplies from other suppliers.

110. The requirement that the changes in relevant economic circumstances must be beyond the control of the Parties is essentially also incorporated into other provisions contained in Article 6.10(a) first and second sub-paragraph of the [Contract]. These provisions require, generally speaking, that when assessing whether it has been possible for the Buyer to obtain the value of natural gas or to economically market the gas in his end user market, one shall assume that the Buyer would act as "a prudent and efficient gas company" and would follow "sound marketing practices and efficient operations". The consequences of any conduct of the Buyer not meeting these standards will have to be attributed to the Buyer himself, and cannot be considered as circumstances beyond his control. Respondent has maintained that Claimants, when reselling gas delivered under [Contract], in several respects did not act in accordance with these standards, and that the consequences thereof are irrelevant in the present price review.

2.3.3 The value of natural gas

2.3.3.1 The market value of natural gas

111. According to Article 6.10(a) first sub-paragraph of the [Contract], any adjustment of the price provisions in Article 6.1 to 6.4 [Contract] shall reflect "in particular the value of Natural Gas in the end user market of the Buyer". Claimants maintain that "the value of Natural Gas" must be determined on the basis of market values and prices actually obtained or obtainable in the end user market of Claimants as a prudent and efficient gas company. Respondent, on the other hand, argued that the value of natural gas is determined by the full costs associated with using competitive fuels minus associated costs for using Natural Gas and that such costs to a certain extent have to be calculated according to a theoretical model. Respondent maintains that the term "value of Natural gas" has long been used in long-term gas contracts, and that in the gas market it is commonly understood as referring to the cost of end users at which they are indifferent to use other fuels than gas. Furthermore, the Parties have previously discussed questions of price review on this basis. Accordingly, Respondent argues that changes of values and prices for gas in a market do not necessarily mean that "the value of Natural Gas" has changed. However, Respondent recognizes that actual gas-to-gas competition affecting the market value of gas may be relevant as a basis for adjustment of the price provisions even if this does not imply any change of "the value of Natural Gas" as so interpreted.

112. In the opinion of the Arbitral Tribunal, the [Contract] itself does not contain any precise provision how to calculate "the value of Natural Gas". Clearly, the word "value" is a quite general term which may cover values determined according to different principles. However, the principle relied on by Respondent does not belong to the group of principles ordinarily used to determine values in most contractual contexts. Had the Parties agreed or intended that the expression "the value of Natural Gas" should be attributed such a particular meaning, they could and should have inserted a provision to that effect in the [Contract], particularly because this expression obviously is a key element in price review provisions of particular importance in long term contracts like the [Contract]. In the opinion of the Arbitral Tribunal, the fact that the Parties at an earlier occasion have discussed questions relating to price review on the basis of the criteria of cost of alternative fuels as referred to by Respondent, cannot be regarded as having contractually binding effects for the future relationship between the Parties in a long term contract such as the [Contract]. Such a discussion does not necessarily mean that the Parties thereby expressed or wanted to express any general view as to what would in principle be the proper interpretation of this expression or to agree on what meaning it should be attributed generally in case of any future price reviews under the [Contract].

113. The Arbitral Tribunal also notes that during the years prior to the present price review the Parties have made several amendments of the price formula, introducing thereby indexation criteria inconsistent with the principle that "the value of Natural Gas" is to be determined by a calculation based on the cost of the best alternate fuel(s) at the burner tip, as argued by the Respondent. In Amendment No. 1 . . . Seller and Buyer agreed to include a wholesale price index in the gas price formula. Similarly, Amendment No. 8 . . . introduced a 20% change in the price formula replacing heavy fuel oil quotations by an investment index. In 2002 Respondent suggested to replace 20% of heavy fuel indexation by statistical investment figures. These events demonstrate that in the past also other criteria than the cost of alternative fuel(s) have played a significant role in the discussion relating to "the value of Natural Gas".

114. In the absence of a clear contractual basis for attributing a special meaning to the term "the value of Natural Gas" as argued by Respondent, the Arbitral Tribunal has to rely on the general principle of [the contract law of the State whose law is applicable] that provisions in contracts between commercial parties shall be interpreted in accordance with the plain and ordinary meaning of the words thereof as read in the particular context in which the relevant terms are used by the Parties. In Article 6.10(a) [Contract] the expression "the value of Natural Gas" is part of a provision referring to "the value of Natural Gas in the end user market of the Buyer, as such values can be obtained by a prudent and efficient gas company". The Arbitral Tribunal considers that in such a context it appears reasonable and justified to interpret the term "the value of Natural Gas" as referring to the ordinary "market" value obtained or obtainable for the commodity in question (gas). A market is an environment where actual transactions are carried out between sellers and buyers, and the "value" in commodity markets is generally determined according to prices contained in offers from sellers and buyers and, in particular, the prices of the various transactions concluded. Accordingly, in the absence of a particular provision in the [Contract] as to the meaning of "the value of Natural Gas", the Arbitral Tribunal considers that this expression should be interpreted as referring to the ordinary market value of gas, and that the market value of gas is to be determined on the basis of prices obtained or obtainable in actual transactions in the various market segments constituting the end user market of the Buyer.

115. Even if one would interpret the term "the value of Natural Gas" as argued by Respondent, such value is to be relevant only "as such value can be obtained" or, in other words, to the extent that such value can be obtained in the end user market of the Buyer. This means that, in any event, the ordinary market value of natural gas in the end user market would constitute an upper limit as to the extent to which the cost of switching to alternative fuels as argued by Respondent would be relevant as the basis for adjustment of the price provisions. The value obtained in the market is the payment/revenue/price which the supplier receives from the entirety of all end customers. The principle that any value determination under Art. 6.10 (a)(1) [Contract] has ultimately to be checked against and is finally determined by the prices actually obtained or obtainable in the market was acknowledged by Respondent . . .

116. The Arbitral Tribunal also considers that the Article 6.10(a) second sub-paragraph of the [Contract] gives support to the interpretation of the term "the value of Natural Gas" as referring to the ordinary market value of gas in the end user market of the Buyer. This provision which is regarded as a safeguard to the benefit of the Buyer states that "in any case" the price provisions of the [Contract] "shall allow Buyer to economically market the Processed Gas in the market of the Buyer in competition with all competing sources of energy". Whether the Buyer is in position to "economically market" the gas in accordance with "sound marketing practices" depends, generally speaking, on the ordinary market value of the gas obtainable in the end user market and, in particular, on the actual difference between such market value and the contract price (P) payable according to the prevailing price provisions of [Contract] at the relevant time. Thus, the ordinary market value of the gas is a key element when considering whether or not the gas can be marketed "economically", although this latter criteria is [sic] of course not giving any precise guidance as to the particular price margin which should be actually obtainable by the Buyer in order that the gas is to be regarded as "economically marketable" in the market. The opinion of the Arbitral Tribunal is that Article 6.10(a) [Contract] first and second sub-paragraphs can be considered as expressing the principle that significant changes in the ordinary market value of gas in the end user market of the Buyer taking place during a price review period shall be reflected by an adjustment of the price provisions, provided that such change is not already reflected in the prevailing price provisions under Article 6.1 through 6.4 [Contract].

117. Both sub-paragraphs of Article 6.10(a) [Contract] contain provisions to the effect that, generally speaking, the relevant market value of the gas is the value obtained or obtainable by the Buyer acting as a prudent and efficient gas company in accordance with sound marketing practices. These standards are to be applied not only when considering the marketing conduct of Claimants when reselling the gas in the end user market, but also when considering Claimants' arrangements relating to transportation, distribution and storage required in connection with such resales of the gas.

2.3.3.2 Determining the market value in the end user market

118. Article 6.10(a) first and second sub-paragraphs of the [Contract] both use the expression "the end user market" of the Buyer. Although this expression refers to the market of the Buyer in singular, as if it were one homogenous market, the resale of gas by the Buyer is actually made in several market segments at different prices and conditions for the various groups of end users, reflecting particularly differences relating to their actual use of the gas needed and their bargaining power in the gas market. The end users of gas are the customers who chemically transform the main constituent of natural gas (methane), into other compounds. This is done either by producing heat through the exothermic reaction of methane with oxygen from air, in particular households, commercial enterprises, industry and power plants, or by transforming methane into hydrogen and applying hydrogen for ammonia production (fertilizer factories) or for hydrogenation of unsaturated or aromatic hydrocarbons (refineries). The price or value of the delivered gas obtainable at the inlet flange of the various customers' conversion facilities represents the end user markets.

119. In the [Buyers' State] market gas sales to end users have not been generally based on any standardized or published uniform price at which all customers could buy gas at identical terms. Gas has normally been sold at the so-called competitive price . . ., i.e. the maximum price each single customer was willing to pay in view of his next best alternative supply of gas or other energies. In most cases, the price obtained included a premium to compensate for the site-specific inherent advantages in using gas instead of another energy, such as reduced emissions, higher efficiency, less storage investments, better payment terms etc. As a consequence, different customers paid different prices for the same commodity gas, depending on (i) the type and price of the potential alternate energy and (ii) the premium applicable in his specific case and (iii) the offtake pattern. Price differences were found not only between customer segments, but also between customers within one and the same segment.

120. The price review clause of [Contract] is linking the price review and adjustments of the price provisions to changes in the end-user market of the Buyer. At the time when [Contract] was concluded and later during the first years of delivery of gas under the [Contract], the [Buyers' State] gas and electricity markets were based on a system of "franchised areas" with a kind of monopoly for a supplier of such energies to the different potential end users within the designated area. This system protected incumbent gas suppliers from competition, and gas prices to be paid by the various customers were for all practical purposes only limited by the cost of using competing fuels. Thus, under such a system Claimants as a main gas supplier could, generally speaking, transfer the increases in the import price of gas, including [Contract] gas, to their customers.

121. This market situation started to change in the late 1990's when it became apparent that [Buyers' State] soon would implement [new legislation]. Clearly, this would mean that the existing system of franchised areas would eventually be eliminated and access to networks would become available for competitive supplier of gas and electricity. A consequence thereof would be that the bargaining power of end users of gas would be strengthened in many of the market segments. Consequently, established gas suppliers could no longer expect to be able regularly to transfer to their customers the increase of import prices due to provisions in oil indexation. On the contrary, one would have to expect that "the value of Natural Gas in the end user market of the buyer, as such value can be obtained by a prudent and efficient gas company", would be affected by new gas-to-gas competition and also by competition with alternative energies such as electricity available in the market, all in accordance with degree of competition actually existing within the various segments of the gas market.

122. Respondent has argued that, under Article 6.10(a) [Contract], changes in electricity prices are irrelevant when determining the value of natural gas in the end user market. The main argument is that fluctuations of market prices for secondary products produced by end users employing gas as an input factor, such as glass, steel, electricity or fertilizer, are not covered by Article 6.10(a) [Contract]. In the case of power generation, this means, in the view of Respondent, that the prices obtained by the power plant for the output electricity should not be taken into account. Respondent argues that a theoretical retrograde conversion of electricity prices to the value of the input gas, including changes of these, is not foreseen under Article 6.10(a) [Contract]. Only the realistic, competitive and market-reflective gas price that power plants are willing to pay to actually run their own gas-fired facilities, is a part of the price or value collected from the end user market according to Article 6.10 [Contract].

123. The Arbitral Tribunal agrees that mere fluctuations of prices for products made by input of gas by end users are generally not relevant when determining the market value of natural gas. This also applies to prices for electricity produced at power plants. However, the legal position is different if changes in the regulation and structure of the [Buyers' State] electricity market and the resulting changes in the prices of electricity, would have as consequence that electricity generally available in the market has become a "competing" source of energy in relation to natural gas as used at power plants. If the changes in the electricity sector mean that end users of gas actually may cover energy needs by buying electricity in the market instead of using gas, the electricity available in the market has become a directly competing primary source of energy with consequences also felt in the gas market. In such a competitive environment, the electricity prices would in fact be an element which is likely also to influence the volumes of the gas traded and/or the ordinary prices obtainable in the gas market. Such a development would no doubt also be relevant when considering, in accordance with Article 6.10(a) second sub-paragraph of the [Contract], whether the price provisions "allow the Buyer to economically market the Processed Gas delivered hereunder in competition with all competing sources of energy in the end user market". In the opinion of the Arbitral Tribunal, sources of energy that actually are competitive to gas, must be judged on the basis of the situation as developing during the relevant price review period. Obviously, the extent to which natural gas meets with competition from electricity available in the market, may vary in the different market segments. Whether and to what extent the changes in the [Buyers' State] electricity market due to the implementation of [new legislation] actually had such effects for the gas market and the ordinary market value of gas, are questions which have to be considered on the basis of the evidence submitted during this arbitral proceedings [sic].

124. Article 6.10(a) [Contract] is referring to the end user market of the Buyer in general and not to any of the various segments of the gas market. Accordingly, in the opinion of the Arbitral Tribunal, it is the change in the ordinary market value of natural gas, determined as if the end user market of the Buyer would be one entire market, which will be relevant when assessing whether there is a basis for adjustment of the price provisions and a claim for price review. The Arbitral Tribunal considers that in an end-user market such as the [Buyers' State] market, characterized by a whole spectrum of different gas prices in the various market segments as described above, the ordinary market value of the gas representative for the market as an entirety has to be determined as the volume-weighted average of all obtained or obtainable prices in the various market segments. Thus, a Party cannot claim adjustment of the price provisions based on selective data from one or more individual segments of the gas market. Having the burden of proof, such Party must substantiate a claim for price review by reliable and timely relevant price information from all the various market segments and calculate a volume-weighted average of the total segmental changes, taking into account also segments that are unaffected or have moved in different directions. Nor would it be sufficient to selectively investigate some or even a majority of the gas customer categories and spread the price changes there observed over the total gas volumes traded. In principle, Article 6.10(a) [Contract] requires that a complete review of all individual customer groups comprising the entire market and the total gas volume traded be provided as a basis for determining the ordinary market value of natural gas representative for the end user market of the Buyer in its entirety.

125. The end-user market of the Buyer is not only supplied by [Contract] gas, but by a mixture of [Contract] gas and other quantities of gas purchased by Buyer from other sources. The end-user market is defined as the aggregate of all customers in the specified area, comprising all customer segments and the total number of end users of the total quantity of gas sold. In the opinion of the Arbitral Tribunal, this means that a Party may not in the [Contract] context base the calculation of the ordinary volume-weighted market value of natural gas on the assumption that the [Contract] gas was to be resold only in selected market segments, or that cost in the marketing of the [Contract] gas was different from other import gas.

2.3.3.3 Significant changes in the market value of gas

126. In order to provide a basis for adjustment of the price provisions according to Article 6.10(a) [Contract], the economic circumstances in [Buyers' State] must have changed significantly compared to what is reflected in the prevailing price provisions of Article 6.1 to 6.4 [Contract]. In the opinion of the Arbitral Tribunal, this means that the consequence of such economic changes must have taken place in the ordinary market value of gas during the price review period. Each Party has to take the detrimental consequences of a change which only is insignificant, for instance because it is of a temporary nature. Obviously, the purpose of such a condition is to prevent too frequent requests for price review and to provide some stability to the price provisions in the contract.

127. The question whether or not a change in the ordinary market value of natural gas during a price review period is significant, has to be decided by the Arbitral Tribunal without being able to rely on any guidance provided by the [Contract] itself. However, the claims for adjustment of the price provisions put forward by each of the Parties during the present arbitral proceedings reveal their assessment of the extent of a change in the market value of gas which could be held to constitute a "significant" change and serve as a basis for adjustment of the price provisions.

128. The Claim submitted by Claimants include the request for a reduction of the base price . . . This would represent a change of 19.3% of the contract price. On the other hand, Respondent in its Counterclaim . . . put forward a Claim for an increase of the base price . . . This Claim represents an adjustment of the contract price by 6.9%.

129. In accordance with these assessments of the Parties, the Arbitral Tribunal is of the opinion that a change of the market value of natural gas, which will entitle Claimants to a reduction of the contract price provisions by 6.9% or more of the prevailing contract price, will constitute a significant change within the meaning of Article 6.10(a) [Contract]. For the purpose of the present arbitration, there is no need for the Arbitral Tribunal to consider whether even changes not amounting to at least 6.9 % would be of significance.

2.4 Reduction of the contract price

2.4.1 Significant changes in the economic circumstances beyond the control of the Parties

130. In paragraph 2.3 above the Arbitral Tribunal has dealt with the legal basis for adjustment of the price provisions according to Article 6.10(a) [Contract], in particular the several questions of interpretation relating to the various conditions for a right to such adjustment, which have been controversial in the present dispute.

131. The main condition is that economic circumstances in [Buyers' State] which are beyond the control of the Parties have changed significantly during the price review period compared to what is reflected in the then prevailing price provisions of Article 6.1 to 6.4 [Contract]. The conclusion of the Arbitral Tribunal on the basis of the evidence submitted by the Parties during the arbitral proceedings, is that this condition is met and, consequently, that Claimants are entitled to an adjustment of the price provisions with the effect of reducing the contract price from 1 October 2001.

132. During the present price review period the contract price for the gas delivered under the [Contract] increased . . . This was due to the provisions of Article 6.4 [Contract] providing for indexation of the gas price on the basis of price quotations for light and heavy fuel oils. However, when supplying gas in the [Buyers' State] market during the price review period, Claimants were generally not able to obtain prices from end users of gas reflecting the substantial price increases for [Contract] gas, and Claimants had to offer rebates and/or reduced prices in order to retain customers. This market situation was mainly due to the enactment of the first and second phase of the [Buyers' State] Electricity Act and the first phase of the [Buyers' State] Gas Act and the various consequences thereof for the [Buyers' State] gas and electricity markets during the price review period, including the changes of the market behavior of end users of gas during this period. In the opinion of the Arbitral Tribunal, these market developments, which are due to circumstances outside the control of any of the Parties, brought about a decrease in the ordinary market value of natural gas in the end user market which is not reflected in the prevailing price provisions during the price review period.

133. The new [Buyers' State] energy legislation meant the abandonment of the system of "franchised area" according to which regional gas and electricity distributors had nearly exclusive rights to supply the customers in their designated areas. This opened up for competition and a choice of suppliers in the electricity and gas sector for important large-size industrial consumers and power generators in [Buyers' State]. Third party competitors were provided access to the gas and electricity networks of incumbent distributors, and the bargaining power of the important large customer segment increased significantly. These changes affected market segments representing approximately 50% of Claimants end user market and led to reorganization of the local distribution companies.

134. Respondent has argued that the new [Buyers' State] legislation was actually enacted relatively late in the price review period and, consequently, that it could hardly have far-reaching consequences for the [Buyers' State] gas market during the review period. However, according to evidence submitted to the Arbitral Tribunal, the attitudes of end customers during the price review period started to change and were significantly affected already at an early part of the review period because major groups of customers anticipated the likely consequences of [Buyers' State] implementation of [new legislation] in the near future. The evidence submitted during the arbitral proceedings shows that the changes of end customers' behavior were felt and were of significance during most of the price review period. In this regard the [Buyers' State] energy market seems to have followed the same pattern as [elsewhere]. It is a commonly known phenomenon that buyers and sellers act in anticipation of announced changes in market legislation and regulations, i.e. well ahead of the actual validity date of any governmental decrees or legislative acts. Accordingly, large end users of gas, being aware of the [legislation] and its mandatory implementation in [Buyers' State] within the following two years, started early to negotiate for rebates and other concessions under existing contracts with their traditional gas supplier even before the corresponding [Buyers' State] Gas Act became effective . . . And smaller customers, claiming equal treatment with their larger competitors, also pressed for price concessions although such customers were not covered by the first phase of the Gas Act. The Arbitral Tribunal considers that significant transformational changes of the competitive environment for gas companies actually took place during nearly the entire price review period.

135. In the opinion of the Arbitral Tribunal the consequences for the [Buyers' State] gas market of the new [Buyers' State] legislation must also be assessed in view of the fact that important changes of the gas and electricity legislation were made simultaneously. The changes in the electricity sector and the forthcoming opening of the electricity markets were also of consequence for the gas market and the ordinary market value of gas, and because the development of the market prices for such electricity would have an impact on the market price and value of gas, see above paragraph V/B/2.3.3.2.

136. The evidence before the Arbitral Tribunal shows that electricity price fell significantly already during 1998. Respondent has argued that this price fall is not relevant because most of the decrease in fact took place prior to the beginning of the price review period. In the opinion of the Arbitral Tribunal, however, the consequences of the price fall and the new competitive environment in the electricity market materialized and were felt in the gas market during most of the review period. It is true, as argued by Respondent, that electricity prices soon recovered and had actually increased by 40% towards the end of the review period. However, during the same period the contract price for deliveries of [Contract] gas changed . . . due to the provisions on oil fuels indexation, and thereby increased by 123%. In any event, the prices in the electricity market would be significant for the prices of electricity produced by regional power distributors and thereby also for the gas prices these end users of gas would be able and willing to pay to Claimants as their gas supplier. Assessing the market pressure to which Claimants as a gas supplier were exposed due to the forthcoming new [Buyers' State] legislation for the gas and electricity sector, the Arbitral Tribunal is consequently not sharing the view of Respondent that the decisive fact in this context is that the volume of gas used by the regional power distributors on the whole remained unchanged during the price review period.

137. Respondent has also argued that the decrease of the gas prices obtained by Claimants during the price review period to a very large extent was a result of rebates and otherwise reduced prices granted by Claimants to end users according to existing contracts, and that such reduction is actually a consequence of events within the control of Claimants, including particular terms contained in the sales contracts which Claimants had concluded with their customers. Claimants, on the other side, have argued that such price concessions were necessary if Claimants should be able to market the gas and prevent traditional customers from using the forthcoming opportunity to choose other suppliers for the future.

138. The Arbitral Tribunal considers that any such conduct on the part of Claimants must be judged according to the standards set out in Article 6.10(a) [Contract], and the main question is whether in such contexts Claimants have acted as a prudent and efficient gas company and applied sound marketing practices. The Arbitral Tribunal recognizes that Claimants have been most reluctant to disclose information relating to the relations between Claimants and their traditional customers, and that this has been of particular concern to Respondent and its assessment of the situation. Nevertheless, the Arbitral Tribunal considers that, in a new and difficult market situation in the gas market, having resulted from events outside Claimants' control, Claimants as a main supplier of gas in the [Buyers' State] market have not acted inconsistent with these standards by adopting a price policy designed to protect their long term relation to traditional customers as well as Claimants' existing market share. The evidence before the Arbitral Tribunal does not substantiate a conclusion that Claimants have applied commercial practices inconsistent with or with consequences contrary to Claimants contractual duty of loyalty towards Respondent.

139. Changes of economic circumstances in the country of the Buyer, including, inter alia, governmental legislation regarding the liberalization of the gas market, mandated third party access to the pipeline grid, increased competitive activities at the customer level, and in general all transformational changes described above, plus the rapid decline of power prices, are not the result of actions initiated, supported or induced by any of the Parties, but are clearly outside the control of any of the Parties. The Arbitral Tribunal therefore concludes that sufficient evidence, including statements by various witnesses, has been submitted to demonstrate that neither Party can be held responsible for these changes of economic circumstances. They were "beyond the control of the Parties" within the meaning of Article 6.10(a) first sub-paragraph of the [Contract].

2.4.2 Quantification of the price adjustment claim

2.4.2.1 The basis for the quantification

140. The conclusion of the Arbitral Tribunal derived from the above paragraph 2.4.1 is that changes in the economic circumstances in [Buyers' State] during the price review period have had the effect of reducing the ordinary market value of gas in the end user market of Claimants compared to what was reflected in the prevailing [Contract] price provisions. As a consequence thereof, Claimants are entitled to have such reduction reflected by an adjustment of the prevailing price provisions of Article 6.1 to 6.4 [Contract]. The claims submitted by both Parties are generally based on the assumption that any such adjustment shall be implemented by a reduction of the base price (P0). Claimants have claimed that the base price (P0) be reduced . . . While maintaining that this claim must be rejected as not substantiated, Respondent has argued that, in any event, such a reduction would be quite excessive.

141. As stated above within paragraph V/B/2.3.3.2, the Arbitral Tribunal considers that the ordinary market value in an end user market such as the [Buyers' State] market in principle will be the volume-weighted average of calculations based on price information comprising all customer segments and the total gas volumes traded. Consequently, a Party claiming adjustment of the price provisions according to Article 6.10(a) [Contract] should be able to substantiate the extent to which the market value of gas has changed during the price review period by reliable information relating to (i) gas prices obtained in all segments of the market, (ii) the changes of the value of gas in those segments during the review period, and (iii) the volumetric changes in those segments during the review period. Obviously, this is both a difficult and a time consuming task. The Arbitral Tribunal clearly sees the difficulties that the Parties will be faced with when to provide, analyze and present all the data and other information required in order to substantiate or to dispute such a price review claim.

142. However, the Arbitral Tribunal is of the opinion that in a case such as the present dispute, where the main question is the extent to which the ordinary market value has changed during the price review period, the degree of such change has to be adequately quantified or measured by such method. In fact, a combination of the relative changes in volumes of gas consumption and of realizations obtained from the end customers in the various market segments provides an acceptable basis for assessing the extent to which the ordinary market value of gas in the end user market has changed during the review period.

143. This approach contemplates that one is utilizing the relative volume shares (percentages of the total volume) per segment to build a representative average end user realization level. Absolute volumes would not work to calculate such average market realizations at any point in time. However, such use of relative (percentage) numbers is of no detriment to any of the Parties as long as the absolute volume variances are within the offtake flexibility of [Contract] gas, i.e. within the range from 90% to 110% of the annual offtake volumes. During the price review period 1 October 1998 to 1 October 2001, the total volumes purchased by [Buyers' State] end customers varied by significantly less than 10% and generally were within the normal volume fluctuations over such 3-year period. Thus, in the context of the present dispute the use of relative volume shares to arrive at comparative numbers is of no detriment to any Party.

144. A first step will be to assess, on the basis of the percentage of gas consumed in each customer segment and the average realizations obtained from the end users in each segment, the relative contribution of each market segment to the average total realization of the Buyer in the end user market. This represents a reasonable scheme for assessing the volume-weighted average value of gas in the entire market of the Buyer. If such numerical evaluation of the gas value is carried out for the situation at the start and at the end of the review period, the difference will express the change of the gas value during the price review period, and this change may be compared with the relative change of the contract prices for [Contract] gas between the same points in time. Such comparison shows whether, over the price review period, end customer realizations increased or decreased more or less than the purchase price for [Contract] gas, leading to a market over- or under-recovery by Buyer.

145. Utilization of end customer pricing within the various segments as a basis for the calculation of a volume-weighted average realization for the market in its entirety at the start and end of the price review period has the advantage that it reflects in numerical terms the changes of economic circumstances encountered in the end user market of the Buyer, regardless whether this is still a fully-controlled or a totally liberalized market or any degree in between. As an example, any new gas-to-gas competition developing during the review period would be reflected in the change of prices achievable at the customer level. Any economic consequences of market liberalization would find their way into the market realization obtainable from the end customer by the supplier of gas. Sales losses in a lower-priced segment and channeling of gas volumes into a higher-priced customer category would automatically lead to its reflection in the change of average market realizations. Any pricing changes for relevant competitive energies would also be fully represented in gas realizations at the end-consumer. The inability, despite best efforts, to pass rapidly increasing gas prices without any time delay onto the end customer will affect the obtainable customer realizations.

146. The Arbitral Tribunal consequently considers that the subsequent comparison of such market revenue changes with the relative change in [Contract] price will show and provide a basis for assessing (i) whether both generally moved in parallel and, therefore, no reason would exist to adjust the price provisions, or (ii) whether these differ significantly and to such an extent that the net market over- or under-recovery, when compared to the [Contract] price at date of review, meets the criteria of "significant" change.

2.4.2.2 The evidence submitted by the Parties

147. Neither Party initially met its obligation to demonstrate the complete market changes to the full extent. Claimants at the outset substantiated their request by selectively providing data from the industry and power segments, but omitted the changes in the other market categories, obviously assuming these did not play a decisive role. In addition, Claimants based their realization/loss argument in the electricity generating sector on the so-called "power-to-gas-convergence", i.e. transformed electricity price declines into a corresponding theoretical reduction of the gas input value. Respondent in its initial submission applied a full-market segmental volume approach, but kept the value/revenue figures for each segment unchanged over the whole 3-year period.

148. The Arbitral Tribunal clearly sees the difficulties that the Parties are faced with initially when to substantiate or to dispute a price review request according to the requirements of Art. 6.10(c) [Contract]. The comprehensive information required by Article 6.10(c) [Contract] to substantiate a price review request has to be submitted to the other Party a few days prior to the end of the review period, and all the data relevant for the complete review period will rarely be available at that date. The other Party is in a similar position when considering if and how to oppose the request and to substantiate his rejection of a claim for adjustment of the price provisions. Accordingly, the Arbitral Tribunal considers that it is appropriate to allow or request the Parties to later provide further information in order to refine the substantiation of their claims, counterclaims or documentation related to previously claimed factual market developments during the review period.

149. In accordance with this view, the Arbitral Tribunal requested both Parties to submit updated information and their market change evaluations in a standardized form to be completed according to a uniform methodology . . . The purpose was to ensure that complete volume as well as realization changes over the review period were properly reflected, and that the information was presented in a form allowing adequate comparison. Such form and methodology, based on reliable sources for the input data, would ascertain that the principles now set out in paragraph V/B/2.4.2.1 above, would be taken into account by both Parties in an identical manner. If at all possible, only independently published or certified data should be used.

150. In response to the Arbitral Tribunal's Order, each Party submitted well substantiated and complete tables of volume-weighted average end customer realizations at the start and the end of the review period, thus clarifying the position of each of the Parties to the question of the change in market value of gas. This information was then compared to the change in [Contract] prices during the review period, suggesting thereby that any under-recovery of the increase in [Contract] prices in the end user market resulted from changes in the economic circumstances, in particular the effects of changing market conditions, see paragraph V/B/2.4.1 above.

151. The comparison of the figures for the average value change of gas and import prices so submitted by the Parties shows the following under-recoveries in the market, i.e. the amount by which the increase of [Contract] prices exceeded the increase of average end customer realizations over the three-year review period . . .

152. The Arbitral Tribunal notes that also Respondent provided figures demonstrating some loss of competitiveness of [Contract] gas, contrary to the basis for its original request for a price increase. In any event, Respondent maintained that the change illustrated was "insignificant", i.e. too small to warrant an adjustment of the price provisions and, accordingly, that Claimants' request should be rejected.

2.4.2.3 Assessment of the Arbitral Tribunal

153. The Arbitral Tribunal has to recognize that there are substantial differences between the data submitted by each of the Parties and between their figures relating to the extent of the average change in the value of gas during the price review period. Such differences may be explained as attributable i.a. to the following circumstances:

• Parties used different published figures for [Buyers' State] gas consumption data. There are at least five different volume statistics published from various sources. They not only differ in the total gas demand figures, but also in the type and in the figures for the segmental breakdown.

• Parties used different figures for [Buyers' State] end customer prices. Again, at least six detailed consultant reports or published price information were presented by the Parties and their expert witnesses as reliable sources of information.

• One party used full calendar year consumption data (from January to December 1998 and 2001), while the other insisted that the [Contract] requires application of gas-year data, i.e. sales volumes from and including October 1998 until September 2001.

• One party used full-country volume data, while the other employed selectively those of Buyer's market . . .

154. In any event, the expert witnesses of each of the Parties differed in their opinion regarding the quality and preference of the one data-set over the other. In the view of the Arbitral Tribunal, each set of data seems to have merits and weaknesses. In order to provide a broader base for the assessment to be made by the Arbitral Tribunal, and to better analyze the potential range of the market under-recovery, the volume set preferred by one Party was combined with various sets of price data provided by the other and vice versa. Applying this cross-check methodology, more than 10 data sets for determining the market under-recovery were obtained. . . . According to this cross-check methodology, applied to a wide spectrum of volume and price data originating from sources deemed to be unbiased and/or reliable, the market under-recovery by Claimants covers a range from. . . to . . . with an average of . . .

155. In the opinion of the Arbitral Tribunal, the results of this cross-check method warrant the conclusion that during the price review period the increase of [Contract] price significantly exceeded the increase of the market value in the end users' market. However, it also appears to the Arbitral Tribunal that, unavoidably, some degree of uncertainty will attach to any precise quantification of the extent of such change on the basis of the evidence submitted by the Parties. This being the case, the Arbitral Tribunal considers that it is clearly preferable to base the quantification of the extent of change on the arithmetic average of the results of the cross-check calculations described above, rather than on an evaluation and assessment of the various arguments put forward by each of the Parties when supporting or disputing the quality and accuracy of each of the two particular sets of data submitted by the Parties. As mentioned above, the sets of data submitted by the Parties have both merits and weaknesses, and the expert witnesses of the Parties were unable to agree which set of data was the most illustrative and reliable.

156. In addition, the Arbitral Tribunal has taken the following into account:

• In each and every of the investigated volume/price combinations, an under-recovery resulted during the price review period. Irrespective of the particular combination of price/volume data, in each case the increase of the [Contract] price exceeded the positive variance of average market realizations during the review period and illustrated the reduced competitiveness of the price for [Contract] gas.

• According to the mathematical theory of statistics, an average number obtained using a wider combination of data considered to be applicable in a specific case provides a higher degree of probability. In other words, if multiple data from various sources of similar reliability are being used to determine the value loss, the level of substantiation increases.

• The average is within the range represented by the two original submissions of the parties . . . and does not fall outside such range. On the contrary, it is not far from the middle of both parties' initial individual submissions.

157. In the opinion of the Arbitral Tribunal, consequently, the multiple-data-average under-recovery of . . . is the most reliable basis available for an estimate regarding the extent to which [Contract] prices exceeded the ordinary market value of gas in the end user market during the price review period. Such a change no doubt meets the criteria of significance in Article 6.10(a) [Contract], see paragraph V/B/2.3.3.3 above. Also, the relative loss of gas market value evidenced thereby is considered to have resulted from changes in the [Buyers' State] market caused by events outside the control of the Parties, see paragraph V/B/2.4.1 above.

158. It is the view of the Arbitral Tribunal, consequently, that such change is to be reflected by an adjustment of the prevailing price provisions of Article 6.1 to 6.4 [Contract] by a reduction of the base price . . .'