(Bloomberg) — The world’s biggest natural gas exporters will seek to defend linking prices to the cost of oil even after courts ruled they overcharged customers and rising output from the U.S. to Australia challenges their dominance.
Tying gas costs to oil will dominate “in the long-term” as the system provides visibility and transparency for buyers, the Gas Exporting Countries Forum said before its second summit of heads of state today in Moscow. RWE AG said June 27 an arbitration court ruled that Germany’s second-largest utility had paid Russia’s OAO Gazprom too much since May 2010 and forced the group’s biggest producer to add links to market prices in its formula.
Utilities are challenging the 40-year-old system after European market prices slumped below oil-linked contracts as the debt crisis cut demand for energy. State-controlled 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.
“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.
Gazprom may compensate RWE 1 billion euros, Der Spiegel reported yesterday. Alexey Miller, chief executive officer of the Moscow-based 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, 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,” Jonathan Stern, founder of the Oxford Institute for Energy Studies, said by e-mail on June 28.
Today’s meeting, hosted by Russian President Vladimir Putin at the Kremlin, will be attended by the presidents of Bolivia, Equatorial Guinea, Iran and Venezuela and the prime minister of Libya as well as representatives from the other members, Algeria, Egypt, Nigeria, Oman, Qatar, the United Arab Emirates and Trinidad & Tobago, Yuri Ushakov, the foreign policy adviser to Putin, told reporters in Moscow on June 28.
“Members have a window of opportunity to at least reshape the discussion, setting its own argumentation against the argumentation of the buyers,” 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. “But it will strongly depend on the ability of the GECF members to find consensus and to work in a collaborative way, which they failed to do so far.”
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.
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.
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 links 13 members that together hold about 60 percent of global gas reserves, will also discuss increasing competition from coal in Europe, Secretary-General Leonid Bokhanovsky told reporters on June 28 in Moscow.
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.
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,” Mitrova said.
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.”
– Anna Shiryaevskaya and Jake Rudnitsky, Copyright 2013 Bloomberg.