Bloomberg News

Gas-Oil Price Link in Focus as Exporters Meet in Malabo

November 21, 2012

Representatives of the world’s biggest gas-exporting countries defended a 40-year-old system that links the price of the fuel to oil amid mounting calls by users to scrap the practice at a meeting in Equatorial Guinea.

Delegates from the 12-member Gas Exporting Countries Forum gathered in Malabo, the African nation’s capital, for the group’s 14th ministerial meeting today. Oil-price indexation was discussed during the meeting, Leonid Bokhanovsky, secretary- general of the Doha-based organization, said today.

Exporters have been under pressure from consumers to revise contracts that link gas and oil as the gap between the two fuels widens. U.S. exchange-traded gas has dropped to less than half that in Europe and a quarter of Japanese prices amid booming production from shale deposits. Trade in the fuel between “major regions” is forecast by the International Energy Agency to rise 80 percent by 2035, outpacing a 50 percent gain in output.

“Spot prices and spot contracts do not encourage long-term investment,” Russian Energy Minister Alexander Novak told reporters after the meeting. “I can’t exclude that both types of pricing would be on the market: both spot contracts and long- term contracts linked to the oil price. But I believe that long- term contracts are the right choice.”

Spot Pricing

Suppliers to Europe including OAO Gazprom, Russia’s natural gas export monopoly, and Statoil ASA (STL) of Norway have increased the amount of spot pricing in their contracts after customers renegotiated contracts.

“Oil-indexation is facing some challenging times,” Thierry Bros, an analyst at Societe Generale SA in Paris, said in a Nov. 12 e-mail. “Nobody in Europe or in Asia wants to sign such a contract any longer. So GECF members, like all other gas sellers, will have to adapt.”

Gazprom took a 78.5 billion-ruble ($2.5 billion) charge in the first quarter on retroactive gas-price adjustments after talks with European Union customers, according to financial statements published Sept. 6.

Further changes to long-term contracts are needed, Klaus Schaefer, chief executive officer of EON SE’s Ruhrgas unit, said yesterday in Moscow.

Europe’s gas usage will drop 1.6 percent by 2017, according to the Paris-based IEA. Increasing coal-fired power generation in Europe has cut gas demand by 3 billion cubic feet a day, according to Sanford C. Bernstein & Co., about 7 percent of consumption.

‘Bigger Growth’

Bokhanovsky offered a different assessment after the meeting.

“Demand is relatively stable in Europe, and this market will demonstrate a little growth in the near future, of 1.8 percent a year,” he said. “We expect a much bigger growth in the market in the Asian region. We’ve already seen considerable growth in the last few years of around 50 percent, and we expect by 2020 it will grow much more speedily, up to 60 percent.”

“So we are not feeling a considerable threat to the gas exporting countries,” Bokhanovsky said.

Statoil agreed with BASF SE (BAS)’s Wintershall to supply an amount equal to about 6 percent of Germany’s annual natural gas demand over the next 10 years in the Norwegian producer’s biggest contract based on spot prices, the companies said yesterday.

Record Prices

Users in South Korea and Japan, the biggest importers of liquefied natural gas, have sought to sign contracts linked to U.S. benchmarks. Average liquefied natural gas prices in Japan, mostly linked to oil prices, rose to a record $18.07 a million British thermal units in July as gas in the U.S. sold for less than $3 a million Btu. Japan and India will begin a joint study on how they can lower costs for imports of LNG, Japan’s Ministry for Economy, Trade and Industry said last month.

Kansai Electric Power Co., Japan’s second-largest utility, said on Nov. 19 it will buy LNG from a unit of BP Plc (BP/), using U.S. Henry Hub futures as a benchmark for pricing under a contract as long as 15 years for the first time.

The GECF’s 12 members hold almost 60 percent of the world’s gas reserves. Unlike the Organization of Petroleum Exporting Countries, the GECF doesn’t profess to coordinate production to influence prices.

Oil Parity

While some members have asserted at past meetings that the price of their commodity should be at parity with oil, they disagree on how that can be achieved. Qatar’s Emir Hamad Bin Khalifa Al Thani said at a summit last year that the group shouldn’t try to limit output while Iran’s Oil Minister Rostam Qasemi called for the group to develop a “market management plan.” Qasemi canceled his attendance at the Malabo meeting, state-run news agency Mehr said yesterday.

“We still consider this oil indexation the fundamental basis for our policy, as well as long-term contracts,” Bokhanovsky said after the meeting. “We consider this linkage could represent some kind of guarantee for the sustainability of the world economy.”

Iraq, which attended the meeting as an observer, plans to join the GECF, Iraqi Vice Minister of Energy Motasan Akram Hassan said after the meeting. The country plans to start exporting natural gas as early as 2018.

GECF’s members are Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Oman, Qatar, Russia, Trinidad & Tobago and Venezuela. Kazakhstan, the Netherlands and Norway have observer status.

The forum plans to hold a summit in Russia for heads of state some time next year, as well as a ministerial meeting in Iran in Nov. 2013, according to a press release from the group.

To contact the reporters on this story: Robert Tuttle in Doha at rtuttle@bloomberg.net; Colin McClelland in Equatorial Guinea at cmcclelland1@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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