PRODUCT PROFILE

Latest Dublin Prices

Europe's gas prices still linked to oil

Friday, February 22 08:13:40

Europe's natural gas supplies are still mostly paid for by contracts that are linked to the price of oil, despite moves by utilities to switch payments towards prices based on openly traded gas hubs, Reuters research shows.

Europe's natural gas suppliers have traditionally sold through long-term deals linked to oil prices, which are relatively high. Power companies want more flexible pricing based on spot gas markets.

Several analysts and banks have recently said that over half of Europe's gas supplies are already being sold on spot-market terms.

Based on data accumulated from gas supply companies, energy consultancies and Reuters research, however, only 34.8 to 37.7 percent of all major European gas supplies are now priced off openly traded hubs such as Britain's National Balancing Point.

"The 35 percent figure is closer to the reality of Europe's gas market today, while gas supplied on a spot basis was between 25 and 35 percent last year," David Cox, managing director of London Energy Consulting, said.

This means that around two thirds of supplies remain under increasingly unpopular oil-indexation contracts (see table).

Norway, one of the region's top gas suppliers, is switching its marketing model and sells almost half of its gas to Europe on a spot market basis. But most major suppliers such as Russia, Qatar and North Africa continue to rely predominantly on oil indexation.

Only suppliers in Britain and the Netherlands, where Europe's two leading gas trading hubs are located, already supply most of their gas on a spot basis.

Britain's gas output is priced entirely according to spot market rates with the exception of a few ageing offshore fields, where supplies are linked to the cost of crude oil.

Analysts point out that it is difficult to judge exactly how much gas is sold under spot or oil links, since the volumes vary even within one deal.

"I am not sure how to address a partial spot indexation, when both oil and spot gas prices are included into the price formula of a long-term contract," said Mikhail Korchemkin, executive director of Eastern European Gas Analysis. ( C) Reuters