Russia and Qatar are under growing pressure from Europe's biggest utilities to scrap a 40-year-old system that links natural-gas prices to oil after Brent crude's 23 percent surge this year.
As delegates from countries that hold two-thirds of the world’s reserves gather in Cairo tomorrow for a one-day meeting of the Gas Exporting Countries Forum, customers from France’s GDF Suez SA to EON AG of Germany are urging producers to link prices to spot markets instead of insisting on long-term contracts that shadow the fluctuations of oil. Contract prices will rise about 15 percent in the next quarter alone, according to Wood Mackenzie Ltd., an Edinburgh-based energy consultant.
“The European contract price of gas is going up,” said Thierry Bros, a senior analyst at Societe Generale SA in Paris. “Utilities won’t sign new oil-linked contracts.”
Europe’s dependency on gas is rising as the region seeks to minimize carbon emissions and nations such as Germany turn away from nuclear power after Japan’s radiation crisis. About two- thirds of continental Europe’s gas is priced under long-term contracts that lag movements in Brent by about six months, making it more expensive than spot markets, where prices more closely reflect supply and demand.
The average price for contract gas from Russia and Norway, the region’s biggest suppliers, will rise to $12.60 a million British thermal units next quarter and $13.15 in the fourth, from $10.95 currently, according to Wood Mackenzie. Spot prices of U.K. gas for third-quarter delivery on London’s ICE Futures Europe exchange were 59.40 pence a therm, or $9.76 a million Btu today. Gas for delivery next month is trading at 58.45 pence on ICE, down 4.3 percent this year.
German Chancellor Angela Merkel’s coalition announced plans on May 30 for the country to exit atomic energy by 2022, after the March 11 earthquake in Japan sparked the worst nuclear disaster since Chernobyl in 1986. Gas produces about half the carbon dioxide of coal in power generation, making it a more attractive option to replace the lost capacity as the region seeks to curb emissions.
Europe “cannot afford” a system with two prices for gas and suppliers must design a framework that suits the European gas industry for the next decade or more, said Jean-Francois Cirelli, vice chairman of GDF Suez (GSZ), the world’s biggest utility.
“Either they merge or something should happen, because it is not possible to be supplied with expensive gas and cheap gas in the long term,” he told reporters in Berlin on May 19.
EON, Germany’s biggest utility, said its global gas unit’s adjusted earnings before interest, tax, depreciation and amortization fell 83 percent in the first quarter and cited “considerable margin pressure” in its wholesale business.
The Dusseldorf-based company has already revised about a quarter of its long-term gas purchases and “renegotiations of the other contracts are moving in the right direction,” EON Chief Financial Officer Marcus Schenck told analysts on a conference call on May 11. RWE AG (RWE), Germany’s second-largest utility, said in April it expects results in 2012 or 2013 from arbitration over gas contracts.
The Gas Forum, which brings together some of the world’s biggest exporters in the same way OPEC groups oil producers, can’t control global production or prices for the next five or 10 years because most supply contracts are long-term, Secretary- General Leonid Bokhanovsky said in December.
The forum’s 11 members are Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad & Tobago and Venezuela. Kazakhstan, the Netherlands and Norway have observer status. Malaysia, Indonesia and Brunei may join as members, and the group may talk with Australia, Turkmenistan and Canada about becoming observers, Bokhanovsky said.
If the traditional practice of selling gas under long-term contracts linked to oil collapses, it’s “entirely possible” that some GECF members may seek to coordinate their production to maximize prices, or concentrate on sales to Asia rather than Europe, said Jonathan Stern, director of gas research for the Oxford Institute for Energy Studies.
“A splinter group of Russia, Qatar and Algeria, possibly joined by Egypt and Nigeria, could emerge,” he said in a telephone interview last week.
Japan and South Korea are the world’s two biggest buyers of LNG, mostly under long-term contracts tied to crude. China has imported LNG since 2006 and operates three liquefied-gas terminals, with an additional 16 planned or under construction.
Gazprom Says Never
Spot markets don’t have enough trading to ensure adequate supply, Alexander Medvedev, deputy chief executive officer of Russia’s OAO Gazprom, the world’s biggest producer, said May 13.
“There has never been any transition to spot-priced market structure, and never will be, because spot market liquidity is insufficient,” Medvedev said in Slovakia’s capital, Bratislava. As soon as economies began to recover from the financial crisis, “it became clear that the market will work as before.”
Qatar’s Energy Minister Mohammed Saleh al Sada struck a more conciliatory tone, saying that the gap between spot prices and long-term contracts is narrowing.
“That difference is closing down gradually except in the U.S., which is kind of a captive market, well below the world average,” al Sada said in an interview in Doha late yesterday.
Russia, Qatar and Iran hold a combined 53 percent of global gas reserves, according to data from BP Plc. The three nations plan to work together to develop deposits in Iran, according to Morten Frisch, an independent liquefied-natural-gas consultant in East Horsley, England. While Iran exports the fuel by pipeline, international sanctions have prevented it from becoming an exporter of LNG.
Chakib Khelil, Algeria’s former energy minister, tried unsuccessfully last year to get GECF members to consider a coordinated output reduction to halt a decline in spot prices triggered by a supply glut. Algeria is Africa’s largest gas exporter and the third-largest supplier of the fuel to Europe.
Rising production of shale gas in North America has changed the supply outlook by curtailing the power of national oil companies and state monopolies, said Alan Riley, a law professor at City University in London.
As an organization, the GECF has yet to find its role, Stern said. That differs from OPEC, which has a policy of setting production quotas.
Cartel or Research Body
“They are completely uninterested in the suggestion they may be a cartel of any sort,” Stern said. The forum sees itself as a research body while politicians and the media are more interested in its potential to control global gas supplies, as OPEC does with crude, he said.
Such a move might have benefits for gas markets because OPEC was able to boost production during emergencies including the current crisis in Libya, said Karen Sund, the founder of Sund Energy AS, a consulting company based in Oslo.
“It’s been useful to have OPEC,” she said. “If people want steady gas prices and at the same time volatile consumption, someone needs to be the elastic band.”
Delegates from GECF member states, including Libya, Iran and Russia, are arriving in Cairo ahead of the meeting. A press conference will be held after the conclusion of the talks tomorrow at about 2 p.m. Cairo time.