Spot Gas Trade Set to Overtake Oil-Indexed Pricing, Societe Generale Says

on Sep 13, 2012
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On 11 September 2012, Reuters reported that Societe Generale (EPA:GLE) had estimated that by 2014, the spot market would overtake oil-indexed pricing which currently favours major gas exporters such as Russia and Norway.

According to Societe Generale’s report, by 2014, spot market based gas trade could overcome the volumes priced off oil indexation. In addition, the bank foresees that spot-indexed volumes will account for 45 percent of the total market by as early as this year. “Oil indexation is facing major challenges. The old system, whereby long-term oil-linked contracts were signed to ensure both security of demand and security of supply and spot trading provided additional volumes, is facing a step change,” the report said as quoted by Reuters.

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!m[](/uploads/story/358/thumbs/pic1_inline.png)The forecast presented in Societe Generale’s report is good news for Europe, since European utilities will be able to buy the majority of their natural gas at more favourable free-market rates rather than at prices linked to the cost of oil. According to a recent Bloomberg article, the increase in gas traded over the counter and on exchanges reflects attempts by Europe’s biggest utility companies to put an end to a pricing system which has led to losses as oil has climbed, benefitting major suppliers, with Russia’s Gazprom (MCX:GAZP) and Norway’s Statoil (NYSE:STO) being the examples quoted most often. In April, the Moscow-based news agency Interfax reported that Gazprom may need to refund European customers as much as $10 billion (£6.2 billion) in retroactive discounts. The Financial Times on the other hand recently wrote that according to Joaquin Almunia, the EU’s competition commissioner and vice president of the Commission, Gazprom’s long-term contracts might no longer be justified because of the emergence of a spot market and increased supply of shale gas.

“In Europe, the rationale for oil indexation disappeared many years ago, so hub pricing makes more sense today,” Societe Generale said, as quoted by Reuters. According to the Reuters article, however, European utilities have so far failed to achieve a higher weighting of spot indexation, although they have managed to negotiate some price reductions. Yet, Societe General estimates that the pattern of European gas supply contracts is set to change in favour of spot indexation by 2014.

Meanwhile, the Kremlin has taken action to shield the state-controlled Gazprom from a formal EU investigation into suspected market abuses, the FT recently reported. On 11 September 2012, Russia’s president Vladimir Putin signed a decree with the purpose of protecting “strategic” companies operating abroad, demanding that any foreign organisation requesting information, assets or changes to contracts from such companies must first seek permission from the Russian government. Mr Putin’s decree was a response to a decision of the European Commission to launch an investigation to establish whether Gazprom has been abusing its dominant position particularly in central and Eastern Europe. The FT quotes Gazprom’s chief executive, Alexei Miller, who pointed out that the new decree would prevent European utilities from negotiating any discounts to supply contracts with the Russian gas group, but will have to approach the Russian government instead.

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