Henry Contract Shifts Ripple Through LNG Pricing Models
What Is the "Henry Contract" in LNG Markets?
The Henry contract refers to long-term LNG sales and purchase agreements (SPAs) that link pricing to the U.S. Henry Hub natural gas benchmark, typically using a formula of 115% of Henry Hub plus a fixed liquefaction fee of $3/MMBtu. This pricing structure has become the dominant model for U.S. LNG exports, accounting for 56% of all LNG volumes sold in 2025. Recent market trends indicate the Henry contract is hinting at the next LNG pricing reset as hub-based pricing surpassed 50% of global LNG contracts for the first time in 2024.
Henry Contract Pricing Formula and Structure
The standard Henry contract pricing mechanism follows a precise mathematical structure that separates variable feedgas costs from fixed liquefaction fees. This design creates destination-flexible contracts that enable secondary trading operations throughout the global LNG value chain.
| Component | Formula Element | Purpose |
|---|---|---|
| Feedgas Cost | 100% of Henry Hub price | Variable cost of procuring natural gas input |
| Variable Liquefaction Fee | 15% surcharge on Henry Hub | Covers variable liquefaction operating costs |
| Fixed Liquefaction Fee | $3/MMBtu (sunk cost) | Capital recovery for liquefaction plant |
| Total Formula | 115% x Henry Hub + $3/MMBtu | Complete delivered LNG price |
The 115% factor specifically accounts for fuel gas consumed during the liquefaction process, which represents approximately 10-12% of feedgas volume plus variable operating expenses. Shipping and regasification costs remain the responsibility of the downstream off-taker, creating clear separation between upstream and downstream economics.
Market Trends Driving Henry Contract Dominance
Hub-based LNG pricing rose to over 50% globally in 2024, marking a historic shift from the traditional oil-indexation model that once dominated 85% of contracts. This transformation occurred as U.S. LNG ramped up at staggering speed since 2016, now accounting for more than 20% of global LNG trade.
- US LNG Expansion: Henry Hub-linked contracts are typically destination-flexible, encouraging secondary trading operations that increase market liquidity
- Rise of Spot Trading: Spot volumes grew from less than 10% in the early 2000s to over 30% of global LNG trade recently
- Emergence of New Players: Aggregators and traders embrace growing LNG market liquidity through hub-based pricing
- Market Opening Reforms: Europe and Asia implement reforms incentivizing buyers to seek pricing diversity
Asian buyers have initiated negotiations for long-term contracts since January 2024, with approximately ten LTCs signed including three or more involving Henry Hub linkage. These buyers negotiated contract slopes ranging between 119% and 121% for DES terms linked to Henry Hub.
Current Margin Dynamics and Pricing Reset Signals
US LNG margins tightened significantly in late 2025 as the indicative long-term LNG contract price exceeded the Argus Gulf Coast spot FOB price for the first time in two years. The front-month Henry Hub price reached a nearly three-year high of $5.06/MMBtu on December 4, 2025, driven by cold weather forecasts and record U.S. LNG exports.
The AGC FOB's premium over the long-term indicative contract averaged $4.11/MMBtu through December 4, 2025, down sharply from $4.63/MMBtu in 2024, $5.37/MMBtu in 2023, and $20.13/MMBtu in 2022. This margin compression signals the next LNG pricing reset as new liquefaction capacity comes online through the end of the decade.
| Year | AGC FOB Premium over Long-Term Contract ($/MMBtu) | Market Condition |
|---|---|---|
| 2022 | $20.13 | Extreme tightenng |
| 2023 | $5.37 | High margins |
| 2024 | $4.63 | Normalizing |
| 2025 (through Dec 4) | $4.11 | Tightening margins |
Many U.S. LNG export contracts will be out of the money if the Henry Hub-TTF spread drops below $4 per mmbtu, and if margins fall below $2 representing LNG production costs, operators will almost certainly reduce production.
Henry Hub vs. Oil Indexation Comparison
The shift from oil-indexation to Henry Hub linkage represents a fundamental restructuring of global LNG pricing mechanics. Oil-linked contracts made up approximately 85% of all contract volumes for delivery into Asia as legacy preference, but Henry Hub contracts are increasingly competitive.
- Henry Hub Advantage: Henry Hub-linked contract prices are currently more competitive than Brent oil-linked prices as oil prices expected to rise due to geopolitical tensions
- Price Forecast: Henry Hub prices forecast at $3.52/MMBtu average for 2025, up 61% from 2024's record low but still below Brent oil at $80/bbl equivalent
- 2030 Projection: Henry Hub influence may make up over 25% of all LNG contracted to Asia by 2030
- Cost Competitiveness: Full cost of Henry Hub linked volumes comes in below Asian spot price indexation, massively increasing appeal
Even if Henry Hub prices reach $5/MMBtu, Henry Hub-linked prices would still be cheaper than Brent oil-linked contract prices with Brent forecast at $80/bbl and potential contract slope around 12%.
Contract Terms and Commercial Structure
Over 90% of LNG volumes sold in 2025 were under free-on-board SPAs, with approximately 95% under 20-year SPAs effective when commissioning completes. SPA contracts commonly have destination flexibility where buyers can deliver LNG to any destination complying with DOE export authorizations and U.S. law.
The take-or-pay structure ensures the fixed fee is paid irrespective of lifted volume, considered a sunk cost in trading determinations. Trading determination processes are driven by the spread or margin between Henry Hub versus regional spot LNG prices and variable costs while ignoring the fixed fee.
Expert answers to Henry Contract Subtle Changes With Outsized Lng Impact queries
What does "Henry contract" mean in LNG industry?
The Henry contract is a long-term LNG sales agreement pricing natural gas at 115% of Henry Hub plus $3/MMBtu liquefaction fee, representing the dominant U.S. LNG export pricing model accounting for 56% of 2025 sales volumes.
Why is hub-based LNG pricing now over 50% globally?
Hub-based pricing reached 51% in 2024, up from less than 15% in 2005, driven by U.S. LNG expansion (20%+ global trade), spot trading growth (30%+ volumes), new trader players, and market reforms in Europe and Asia.
When will the next LNG pricing reset occur?
Margin compression signals brewing reset as AGC FOB premium dropped from $20.13/MMBtu in 2022 to $4.11/MMBtu in 2025, with new liquefaction capacity coming online through 2030 putting downward pressure on margins.
How does Henry Hub compare to oil-indexed LNG pricing?
Henry Hub-linked prices remain cheaper than Brent oil-linked contracts even at $5/MMBtu Henry Hub versus $80/bbl oil, with Asian buyers negotiating 119-121% slopes for DES terms since 2024.
What are the key risks in Henry Hub-linked LNG contracts?
Contracts turn out-of-the-money if Henry Hub-TTF spread drops below $4/MMBtu, and production cuts occur if margins fall below $2/MMBtu representing production costs. Henry Hub forward curves could surpass $4/MMBtu in 2027 coinciding with new U.S. and Qatar supply.
