Gas Exporters Defend Pricing as Courts Reject Link With Oil

The world’s biggest natural gas exporters vowed to defend a 40-year-old system for setting prices irrespective of court rulings that they overcharged customers.

“Rejecting the basic principles of long-term contracts means not only a blow for gas producers but also serious costs, and it would undermine energy security for consuming nations,” Russian President Vladimir Putin said today in Moscow at a summit of the 13-member Gas Exporting Countries Forum that groups nations from Russia to Qatar. “The oil link is the fairest and most market-oriented” way of pricing gas.

GECF members unanimously agreed to uphold long-term gas contracts and continue to support pricing based on oil, the group said today in a statement.

Utilities are challenging contracts with producers after European market prices slumped below oil-linked contracts as the debt crisis cut demand for energy. Russia’s OAO Gazprom has earmarked as much as 200 billion rubles ($6 billion) for potential rebates to European utilities this year. The estimate is higher than the 114 billion rubles set aside in 2012 and enough to meet all necessary payments, Chief Financial Officer Andrey Kruglov said June 27 in Moscow.

RWE AG, Germany’s second-largest utility, said June 27 an arbitration court ruled it had paid Moscow-based Gazprom too much since May 2010 and forced the Russian state-owned export monopoly to add links to market prices in its formula.

‘Tipping Point’

“This could well be the tipping point that ushers in a new commercial era for European gas,” Trevor Sikorski, an analyst at Energy Aspects Ltd. in London, said June 28 by e-mail. “If so, the impact will be felt wider than Europe, with Asian customers looking longingly at European and U.S. hub prices, and seeing that commercial arbitration might be one way of lessening the burden.”

Electricite de France SA, Europe’s biggest power producer, in April obtained lower gas prices for its Italian unit Edison SpA through arbitration with Sonatrach of Algeria, Europe’s third-biggest supplier after Russia and Norway. Qatar’s Ras Laffan Liquefied Natural Gas Co. has also lost an arbitration case related to oil-linked pricing.

The RWE ruling “creates a precedent for the rest of Europe and should put an end to 40 years of oil-indexation history,” Alberto Gandolfi, an analyst at UBS AG in London, said in a June 28 note. About 85 percent of the euro area’s gas purchases rests on oil indexation and moving to traded prices for the fuel will save the region 12 billion euros ($15.6 billion) a year, according to the Zurich-based bank.

‘Big Deal’

Gazprom may compensate RWE 1 billion euros, Der Spiegel reported yesterday. Alexey Miller, chief executive officer of the exporter, declined to comment on June 28 on commercial details of the arbitration. The ruling won’t put pressure on the company’s European contracts, he said.

“This goes further than Gazprom,” Jonathan Stern, founder of the Oxford Institute for Energy Studies, said by e-mail on June 28. “Any seller with a long term oil-linked price contract must now fear that the chances of an arbitral tribunal upholding this mechanism are severely reduced, this is a very big deal for Sonatrach as well.”

Today’s meeting, hosted by Putin at the Kremlin, was attended by the presidents of Bolivia, Venezuela, Iran and Equatorial Guinea. They were joined by energy ministers or representatives of other members including Algeria, Egypt, Nigeria, Oman, Qatar.

Trading Jump

Global gas trade will jump 30 percent in the six years through 2018, led by soaring Australian exports and boosted by North American LNG shipments at the end of the period, according to the International Energy Agency. That will increase pressure on exporters to revise the system of linking long-term supply contracts to oil as the gap between the two fuels persists.

“As LNG trade increases, the situation on the gas market will change and it will become as global as oil trading,” Putin said today. “Then maybe one may start thinking about other forms of pricing.”

While most of the members spoke in favor of the oil link in gas contracts, Qatar’s Energy Minister Mohammed al-Sada said pricing should also take into account interests of consumers.

Next-month U.K. gas, a European benchmark, was on average $1.75 per million British thermal units cheaper than Russian fuel at the German border in the year through May, according to Bloomberg calculations based on prices from ICE Futures Europe and the International Monetary Fund.

OPEC Analogies

The GECF, which evolved at the start of this century, said at a summit in November 2011 that they should cooperate to increase prices and boost supply. The group hasn’t been as effective as the 53-year-old Organization of Petroleum Exporting Countries, which meets twice a year to tweak crude-oil output quotas with the aim of influencing prices.

“While the GECF countries are very important to the global gas community, more major suppliers means the ability to control price and volume is diminished,” Graham Freedman, senior analyst for European gas and power at Wood Mackenzie Consultants Ltd. in London, said June 26 by e-mail. “This is similar to OPEC, where non-OPEC production, particularly from Russia and the U.S. is reducing the influence that OPEC has on oil pricing.”

The GECF, which holds about 60 percent of global gas reserves, isn’t aimed at forming a cartel, Putin said.

Nations outside the group are set to increase output at a faster rate than most GECF members. Australian gas production will rise 156 percent in the six years to 2018 to 141 billion cubic meters a year, making it the world’s fourth-biggest supplier after the U.S., Russia and Qatar, the Paris-based IEA said June 20.

Russian Power

Meanwhile, LNG shipments from many Middle Eastern, Latin American and Asian exporters will decline, according to the IEA. Angola last month supplied its first LNG with the start of a liquefaction plant with capacity of 5.2 million tons a year.

“I think the GECF will try to consolidate its position in order to be prepared for the newcomers,” Tatiana Mitrova, head of oil and gas development at the Energy Research Institute of the Russian Academy of Sciences, said June 26 by e-mail.

Putin is seeking to assert the nation’s influence on the global gas market by expanding exports to Asia and supporting new LNG projects. He said in February he favors partial removal of Gazprom’s monopoly on exports in a bid to raise Russia’s share of the LNG market.

While Russia accounts for 26 percent of cross-border pipeline trade, its LNG volumes accounted for 4.5 percent of the total market last year, according to BP Plc’s Statistical Review.

“GECF has no power but Russia has and will continue to have a market power in gas,” Thierry Bros, an analyst at Societe Generale SA in Paris, said June 26 by e-mail. “Gazprom is facing some challenges but also has plenty of opportunities, such as Asian gas demand.”

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