EU Gas What Lies Ahead After Oil Indexation for Europe?
This year could see the share of total European gas supply priced under oil-indexed formulas fall to less than 50%.
By Dr. Thierry Bros
OIL INDEXATION IN European gas markets is facing major challenges. The old system – whereby long-term oil-linked contracts were signed to ensure both security of demand and and supply and hub- spot trading provided additional volumes – is facing a step change. In Europe, the rationale for oil indexation disappeared many years ago, so gas hub pricing makes more sense today. According to our estimates and due to the drop
in European gas demand, European gas supply was 57% oil-indexed and 43% spot-indexed in 2012. This year could be the one in which the share of total European supply priced under oil-indexed formulas falls to less than 50%.
Wide Variation of Contract Prices Continues Given that each contract is different, we end up
with a wide variation of (non-transparent) contract prices inside Europe. For example, according to the European Commission, in H1 2012, Bulgaria was paying 52% more than Germany for Russian gas delivered under a long-term contract.
... low demand and more flexible infrastructure are resulting in increased price alignment
Going forward, with further renegotiations
(Wingas, Econgas and GDF SUEZ having asked Gazprom to renegotiate) this split is expected to move towards an increased spot component. On top of this, RWE has taken Gazprom to arbitration. The target of RWE is to fully index contracted volumes to spot
UK Market (spot) 17%
Other Oil Indexed 10%
Source: SG Cross Asset Research March 2013 63 Figure 1: European Gas Demand
450 460 470 480 490 500 510 520 530
2000 2002 2004 2006 2008 2010 Source: SG Cross Asset Research, IEA for historical data 2012e 2014e2016e 2018e
Figure 2: European Gas Supply: 57% Oil-Linked in 2012
Other Spot (incl. Gazprom, Norway and Gas Terra) 26%
Gazprom (oil) 23%
Sonatrach (oil) 10%
Norway (oil) 7%
Gas Terra (oil) 7%
bcm
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