* Norway's Statoil quickest to open to spot market
* Russia's Gazprom reluctant but has more spare capacity
* Russia, Norway compete with overseas LNG suppliers
* More spot market pricing may not mean lower prices
By Henning Gloystein
LONDON, Feb 13 Norway's aggressive pricing has
forced rival gas exporter Russia to backpedal on costly
long-term contracts and start offering competitive spot market
deals but European buyers can't expect to pay much less soon.
Europe's two biggest natural gas suppliers, Russia's Gazprom
and Norway's Statoil, have traditionally sold
through long-term deals linked to oil prices that are now high.
European utilities, hurt by paying steep prices for gas due
to the oil connection while wholesale power prices are low, have
pressured gas exporters to move away from the link with oil.
These power companies want more flexible pricing based on
spot gas markets, such as Britain's National Balancing Point
To win market share, Statoil was the quickest of Europe's
main suppliers to react by moving more gas to the spot market.
Europe's second biggest gas supplier after Gazprom already
sells around half of its gas under spot terms, and says it
expects this share to increase.
Analysts say Gazprom must respond or face the consequences.
"If Gazprom is determined to preserve oil-indexation then it
will lose market share," the Oxford Institute for Energy Studies
said in research note.
Statoil sold record volumes in 2012, even as the European
gas market shrank, squeezing as much as possible from fields.
This caused Russian gas exports to Europe to
fall by nearly 10 percent in January-November 2012.
To address the market share decline, Gazprom made price
concessions worth billions of dollars in 2012 and says it will
give further rebates on long-term deals this year, although it
is still holding on to oil-indexation as its main model.
The company says that the share of spot prices in its
contracts is around 7 percent, although some deals with
customers have higher spot proportions.
This puts the Russia well behind the trend.
The Oxford Institute says around 45 percent of gas sold in
Europe in 2012 was based on spot market price models instead of
long-term contracts linked to oil.
"In 2013 this process will go beyond the tipping point: more
than half of Europe's gas will be priced in relation to hub and
exchange prices," the institute said.
Germany's Commerzbank said this week that
increased trading volumes in Europe's gas markets pointed
towards more spot-market driven contracts.
"Increased trading volumes point in the same direction. The
British market is now what is called a liquid market," the bank
said in a research note. Liquidity in continental Europe was
also rising, albeit at a slower pace due to the long-term
contracts between gas suppliers and utilities, it added.
Oil-indexed gas pricing began after gas was found in the
North Sea and the Netherlands in the 1960s and sales contracts
were priced against competing heavy fuel oil and heating oil.
GAZPROM NEEDS TO DO MORE
Analysts say Gazprom is going to have to do more that it has
already announced to regain European market share, which makes
up 80 percent of its income.
"Success will be contingent on Gazprom taking a more
proactive approach to pricing flexibility, rather than simply
reacting to market trends," said Andrew Neff, energy analyst at
But Gazprom could have a competitive edge with its pipelines
that bring gas straight to Europe without the costly rigmarole
associated with shipping liquefied natural gas, which is
beginning a time of relatively lower availability.
"We are entering a period where the amount of overseas
liquefied natural gas available to Europe is coming to an end as
Asian demand keeps increasing and little new global LNG capacity
is going to be added over the next couple of years," said
Massimo Di-Odoardo, senior researcher at energy consultancy Wood
"Just at a time where LNG is going to become scarce in
Europe, Gazprom will have new pipeline capacity right in the
heart of Europe's liquid markets when the NEL pipeline will be
fully operational by the end of this year," he added.
The North European Gas Pipeline (NEL) will connect Germany
and northwest Europe with Russia's vast Siberian gas reserves.
OPEN MARKET DOES NOT MEAN LOWER PRICES
A more market-driven European gas sector will allow
customers to switch more between suppliers, using either LNG or
pipelines, depending on offered prices and spare capacity.
"It's becoming a global gas market and we could see much
more competition between major pipeline suppliers in Europe as
they seek to lock in some supply before a wave of new LNG from
Australia, and possibly the U.S., comes to the market later in
the decade," Wood Mackenzie's Di-Odoardo said.
Commerzbank said the increase in global LNG capacity would
stagnate in the next few years, before picking up after 2015.
Analysts said however that a greater role for the spot
market would not necessarily bring lower gas prices in future.
"With traded forward gas prices going up and traded forward
oil prices going down, spot indexation for the gas market looks
increasingly attractive for gas exporters," he said.
Benchmark Brent crude oil shows a drop in forward
prices, from almost $119 per barrel currently to around $95 a
barrel by 2016, according to Reuters data.
Benchmark UK NBP forward gas prices, by contrast, are seen
rising slightly from around 65 pence ($1.00) per therm currently
to almost 70 pence by 2016.
"Maybe they (Statoil) believe spot prices will grow above
long-term prices and are switching increased volumes to it. Spot
prices have been actually steadily rising recently," Gazprom's
export chief Alexander Medvedev told Reuters.