Gas prices vindicate oil indexation: GECF
As European spot prices for month-ahead delivery broke out above $1,000/'000 m³ September 28 for the first time ever, the Gas Exporting Countries Forum advised buyers to switch to long-term contracts.
The Dutch hub, the Title Transfer Facility, was assessed at $26.8/mn Btu and the Japan-Korea Marker for November delivery at $29.4/mn Btu that day.
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In a statement September 29, the 18-member-country alliance said a number of factors were responsible, including growing post-pandemic gas demand; concerns over upcoming winter supplies; and gains in other energy markets. And European storage inventory is about 15% lower than the five-year average.
It said that markets are "simmering with concerns about winter natural gas prices surge. Colder-than-average temperatures could trigger extreme volatility for natural gas prices in the upcoming winter in Europe. Any further hike in price will feed into utility costs, which are already weighing heavily on European consumers facing multiple pandemic-related challenges as gas is broadly used for home heating and cooking as well as electric power generation."
It said Italy's government has unveiled a plan worth €3bn for the most vulnerable households, as gas and electricity prices could increase by 30-40% in the next quarter in the context of surging gas prices. France has said it will send a one-off €100 payment to over 5.8mn low-income households. In Spain, the government has promised to bring prices down to 2018 levels, while the UK government committed to ensure no customers will experience gas cuts during the winter.
The GECF said public scrutiny of the EU‘s green’ energy transition was mounting as the costs rose. As well as commodity prices, the cost of carbon has also shot up by about 80% this year, from €34/metric ton in January 2021 to as high as €65/mt in September.
GECF said these conditions validate its "long-held position" on a balanced approach to managing the energy transition. The GECF said its continuous support of the various realistic pathways in the energy transition calls for an inclusive and uninterrupted access to modern energy sources while highlighting energy security as a foremost global agenda item.
It repeated its adherence to the spirit of 2019 Malabo Declaration that "unreservedly supports the fundamental role of long-term gas contracts as well as gas pricing based on oil/oil products indexation, to ensure stable investments in the development of natural gas resources."
This structure protects both sides: buyers and suppliers, and still was used – if not so much in Europe. "For example, Qatar's long-term contracts represented around 60% of its natural gas exports. Algeria, Russia, and other GECF member countries have also favoured and will continue to rely on long-term contracts with pricing indexed to oil. That is certainly one way to ensure unabated supply of gas to all parts of the world and avoid a future gas crisis," it concluded.
With crude about $80/barrel, oil-indexed gas would not be above $11/mn Btu delivered ex-ship, a fraction of the spot price. Without long-term contracts, producers argue, there is not enough justification to take on the cost and risk of upstream developments. Spot prices for gas can fall, and investments will not be made upstream on the basis of a market that is focused on the short term.