IEA’s Birol Expects ‘Creative’ Gas Contracts, Away From Oil

The pressure to switch away from long-term oil-indexed gas contracts will continue after some buyers were successful in renegotiating terms, according to Fatih Birol, chief economist at the International Energy Agency.

“How the long-term contracts are formulated may evolve, moving away from the oil-based contract to some new, creative solutions,” Birol told reporters today at a conference in Oslo. “I don’t expect a divorce between the oil prices and gas prices, but there are maybe some longer-distance relationship.”

Gas for next month has tumbled 32 percent in New York this year amid rising production from shale formations in the U.S. and as exporters increased liquefied natural gas capacity, contrasting with an about 8 percent gain in crude prices. A glut of gas damped European spot prices, pressuring producers to reduce a link with oil prices common in long-term contracts.

“There are at least three European companies which have been successful with the key gas exporters to renegotiate” in the past months, Birol said, declining to give their names. “There will be more and more pressure in that direction.”

European gas consumers, such as E.ON Ruhrgas AG, Germany’s largest utility, have multiyear contracts linked to crude and oil product prices. Last year spot gas prices dropped to about half the level of long-term contract rates, leading customers to seek more flexible terms and cheaper gas from producers such as OAO Gazprom, Russia’s gas export monopoly, and Statoil ASA, Norway’s biggest gas producer.

Gas Hubs

Gas hubs should become the dominant pricing mechanism for the fuel in Europe because the market has diverged from oil product markets and little switching capacity remains between the two, Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, also said in Oslo. Moving to hubs would enhance the competitiveness of the fuel, Stern said.

“The economic logic of market-based pricing based on oil has disappeared,” Stern said. “My great fear is that some long-term contracts will not survive the passing of oil-linked pricing and I fear this particularly with the Russians who are deeply opposed to any move to hub-based prices.”