The notion of linking natural gas to crude oil is a funny one for the uninitiated in North America, where an abundance of supplies and a robust wholesale market reign. However, nearly three-quarters of all the world’s liquefied natural gas (LNG) trade is tied to oil prices.

Unlike oil, the global gas trade has no single benchmark to unify it like Brent. The market has grown more liquid over the last decade as more LNG producers, particularly those in the United States, and large commodity traders have gotten more involved. While that has led to more short-term and spot buying with gas hub-linked prices across the world, more traditional long-term, oil-indexed contracts remain dominant.

Oil-indexed contracts accounted for about a quarter of gas purchases in Europe in 2018, according to the International Gas Union’s (IGU) latest wholesale price survey. While most of those were predominantly pipeline imports, oil is still linked to LNG purchasing in Europe, a key balancing arm for the world’s gas trade.

In gas starved countries like Japan, China and South Korea, respectively the world’s top three importers, there are even more deals tied to oil. The IGU said oil-linked contracts accounted for about 67% of purchases in 2018.

Early liquefaction projects were built to monetize stranded gas by marketing LNG to power and gas utilities that otherwise had little or no access to natural gas. Financing for such projects was underpinned by long-term, take-or-pay sales contracts, which would typically last for 20 years or longer. Without traded natural gas markets, the buyers would agree to pay a contract price indexed to oil.

For example, in the Asia-Pacific region, LNG contracts are typically tied to the Japan Customs Crude, aka the Japan Crude Cocktail (JCC). The JCC is a weighted-average price of a mix of crude oils imported by Japan, mostly composed of sour Dubai and Oman crudes.

When LNG trade began in places like Japan, power generation was extremely reliant on oil and contracts were linked to the cocktail to hedge against the risk of competing with crude.

While pricing in Asia, Europe and North America has increasingly been tied to natural gas pipeline points like the Henry Hub, the Dutch Title Transfer Facility, the National Balancing Point or a pure LNG indicator like the Japan Korea Marker, the super-chilled fuel is still linked to a wide variety of oil. In addition to JCC, for example, contracts are linked to Brent crude or even the average price of Indonesian oil.

Under oil-linked contracts the buyer agrees to pay a certain percentage of a crude indicator — referred to as a slope. It’s generally assumed that today’s contracts carry a slope of roughly 11-15%.

However, the ceiling, or the highest slope a contract could carry, is 17.2%. Crude oil has a 5.8-to-1 heating value equivalent to natural gas. The reciprocal of that is 17.2%, which means that if the slope of natural gas is greater than 17.2%, then gas would be more expensive than crude on a heating value basis.

To be sure, oil’s precipitous slide in recent months is likely to squeeze the margins of LNG producers with supply contracts tied to oil, like those in Australia, Indonesia, Malaysia, Russia and Qatar. Assuming a Brent crude price of $35/bbl today at a slope of 15%, oil-linked LNG would cost about $5.25/MMBtu, well above major global gas benchmarks that have hovered at or well below about $2.00/MMBtu, but far less that the $12.00/MMBtu that brent-linked LNG was fetching at this time last year.

Even still, prices aren’t likely to slip below the breakeven levels of LNG producers with more exposure to crude prices. Supply deals can be complicated, but there are a few things to keep in mind.

Some oil-linked contracts are insulated by formulas that guard against the impact of high crude prices on buyers and low crude prices on sellers. A floor was developed for suppliers making significant investments on liquefaction projects, while buyers were given some reassurance with a ceiling that prevents LNG prices from rising under the contract model.

Oil must also be lower for longer too, as buyers typically pay the average price of crude over the previous three to six months.

While global trading tied to natural gas prices has increased sharply in recent years and the market has grown more liberal, questions have surfaced about the longevity of oil-indexed contracts as some large buyers have at times been sidelined from participating in the fall in spot gas prices.

The coronavirus has turned that notion upside down and could change how future contracts are written in a variety of ways given some of the disruptions caused by the pandemic. Oil indexing could have some staying power if buyers and sellers see it as a safer play.