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Page added on September 12, 2012
Relations between natural gas suppliers and consumers in Europe have come to a crunch point over pricing as buyers seek to wriggle free of long established but costly contracts and benefit from newly available sellers elsewhere.
The clash is becoming more political as sparks fly between the European Union and its leading gas supplier Russia.
Major natural gas exporters like Russia, Norway or Qatar sell mostly under long-term contracts that are linked to oil.
Because oil prices have stayed high despite economic turmoil, European power and gas suppliers are being squeezed as they buy gas under long-term deals linked to oil, while having to sell it to customers at lower retail prices linked to the freely traded spot market, such as Britain’s National Balancing Point (NBP).
In several recent contractual renegotiations Gazprom , the world’s biggest exporter of pipeline gas, and Qatar, leader of liquefied natural gas (LNG) exports, have given in to customer pressure and reduced their prices.
Customers are also due to renew contracts with Norway’s Statoil.
French bank Societe Generale said this week that it expected oil-indexed gas supplies to see a lower weighting than spot indexation in the pricing structure of European gas supply contracts by 2014.
“Oil indexation is facing major challenges. The old system, whereby long-term oil-linked contracts were signed to ensure both security of demand and security of supply and spot trading provided additional volumes, is facing a step change,” SocGen analyst Thierry Bros said.
Oil-indexed gas pricing began after gas was discovered in the North Sea and the Netherlands in the 1960s and sales contracts were priced against competing heavy fuel oil and heating oil.
The backlash against oil-linked contracts has gained ground as waning demand for gas and economic recession across Europe forces utilities to defend dwindling profit margins.
Discoveries of natural gas reserves in East Africa, Australia, the Mediterranean Sea, as well as the shale gas boom in North America are also expected to help push natural gas above coal as the second biggest fuel source by 2030 and later could even challenge oil.
These discoveries not only pose a challenge to pricing models of LNG export leader Qatar, but by delivering the super-cooled gas by ship to ports across the globe they also threaten the longstanding dominance of pipeline powers such as Russia or Norway.
“Europe will, in the long term, decrease the region’s dependence on supplies from Russia and the Middle East, thus reducing their dominance in energy markets,” Frost & Sullivan Consulting Analyst Michael Mbogoro said in a report published on Wednesday.
“It is likely to also give rise to new geopolitical alliances at the expense of old,” he added.
RUSSIA UPS THE PRESSURE
The stand-off between suppliers and customers came to a head this week when Russian President Vladimir Putin issued a decree protecting Gazprom from an EU anti-monopoly investigation.
It is not clear how the European Union will react.
“This is basically the Kremlin tightening its control over Gazprom to ensure that the Russian state has final say over any discounts that the company may agree to with its European buyers,” said Andrew Neff, senior energy analyst at IHS Energy.
Analysts say the Kremlin’s involvement will shift talks to a political level because European customers do not want to ruin their relationship with their dominant gas supplier.
“If European companies are going to go running to the European Commission to pressure Gazprom, the Russian government is going to make sure that Gazprom has the full protection of the state, with the result being that these commercial negotiations are going to shift to a political sphere far more overtly as a result,” Neff said.
The European Commission started an anti-trust investigation focused on Gazprom’s policy of linking contract gas prices to oil prices last year that have included raids of Gazprom subsidiaries in Europe.
“If Gazprom imposes too high prices, that is an abuse because that its unfair pricing. It is not a case of the Commission wanting to fix prices, it is the Commission making sure that the company does not abuse its dominant position and that conditions in the market are fair,” said Serge Durande, an antitrust lawyer at Brussels-based Bird & Bird and formerly a senior official at the European Commission’s competition unit.
“It is for Russia to understand how the legal system works here in the EU,” he added.
The European Union receives around a third of its gas from Russia, but Gazprom is even more reliant on European revenues, with around 80 percent of its gas being sold to Europe.