Antonio Brufau: Natural gas prices may break their link with oil.
Repsol YPF boss sees end to oil-gas link
Repsol YPF chief Antonio Brufau said linking gas and oil prices in natural-gas contracts may be “questioned” since they fail to reflect the fundamentals of supply and demand.
“Market agents will face a lot of pressure to abandon oil price-linked formulas in long-term contracts, especially if there continues to be an excess of potential supply,” Brufau said today at the World Gas Conference in Buenos Aires.
Companies including Germany’s E.ON Ruhrgas and GDF Suez of France get most of their fuel from sellers such as Russian gas monopoly Gazprom and Norwegian state-controlled StatoilHydro under multi-year contracts whose price is set by formulas linked to six-month-old oil prices, according to a Bloomberg report.
Maintaining the current pricing structure is “the most important” task as demand falls, Gazprom has said.
Natural gas in Europe may be sold without a formal link to crude oil by the end of next year, according to the Oxford Institute for Energy Studies.
Russia provides about 300 billion cubic metres of gas per year to Europe.
“Oil-linked contract prices have become untenable in the face of a surplus of gas supply which has seen short-term prices at around half of oil-linked levels for several months in 2009,” Jonathan Stern, director of gas research at the Oxford Institute, said in a paper published on its Web site.
The move would be “a revolution” in a conservative industry, Stern said in his paper.
The importance of oil indexing may begin to decline where gas-on-gas competition and traded markets develop and existing contracts present opportunities to change, the International Gas Union said in its Natural Gas Industry Study to 2030.
“The European Commission is likely to continue to press for changes in the direction of gas-to-gas competition-based pricing, but it can not push very hard until trading platforms develop further,” IGU said in the study.
Natural gas in New York rose above $5 per million British thermal units for the first time in almost nine months on 5 October.
Gas for November delivery gained 9 cents, or 1.8%, to $4.996 per million British thermal units at 9:55 am today on the New York Mercantile Exchange.
Many developed economies including the US have more fuel than needed after the first global recession since World War II pared gas demand.
US producers boosted output after shale-gas formations come online, diverting or canceling loads of LNG that had been destined for the US, according to Brufau.
Those LNG shipments will likely be sent to Europe or the Pacific Basin, Brufau said. Spain is building up stockpiles of LNG as it seeks to reduce dependence on natural gas supplies from Russia.
Demand from China and India will make up for the drop in consumption from developed nations, he said.
Climate change policy may favor the development of the fuel more than coal, according to Brufau.
Electricity providers will turn away from coal if governments require the use of carbon capture technology, which is currently too costly, he said.
Most growth for the natural gas industry will come from electricity providers who switch from coal to power their grids, he said.
“I think it is natural to believe that gas demand will increase more than what was expected, to the detriment of coal,” he said.