Ministers want to index gas to oil to save prices

The world’s biggest natural gas-producing countries agreed on Monday to try to index natural gas prices to oil, but steered away from any plan to establish output quotas as a way of tackling slumping prices.

 

The decision by the Gas Exporting Countries Forum, or GECF, comes as natural gas, which had traditionally been sold under long term contracts, has failed to realize the kind of price rebound registered over the past few months in oil markets.

 
Producers say higher prices are key to sustaining the kind of investment necessary to continue exploration and production efforts. But gas prices have nearly halved over the past two years, prompting some of the GECF’a 11 members, like Algeria, to push for for a cartel-like organization that could increase rates by agreeing on output quotas similar to those of the oil-producing bloc, OPEC.

 
The final declaration issued by the GECF, whose members hold some 70 percent of the world’s natural gas reserves, made no reference to quotas.

 
The forum’s statement says members “agree that ensuring adequate and reliable supplies of gas at prices reflecting parity with oil prices … is a challenge.”

 
The group, whose members range from Qatar to Russia, is an increasingly structured body that tries to model itself somewhat on the 12-member Organization of the Petroleum Exporting Countries. It was the first time a ministers’ forum produced a final declaration, but its decisions are not binding.

 
Algerian Energy Minister Chakib Khelil, who headed the forum and read the final statement, told reporters he believed the right price ratio should be 1-to-6 between gas and oil. But he did not spell out a timeframe for achieving that link.

 
Khelil said he hoped decisions would “mark a new era for our organization.”

 
In essence, the statement means GECF member countries will each try to revise their existing or new contracts with oil firms so that their stated price for gas is indexed to that of oil, rather than spot, short-term gas trading contracts as has increasingly been the case.

 
Russian Energy Minister Sergei Shmatko, whose country holds the world’s largest reserves, said all GEFC countries agreed on this, and would strive to reduce the price gap between liquefied gas traded as short-term contracts on the stock exchange and the long-term natural gas contracts.

 
He also said he was “concerned about the existing idea to impose carbon taxes” on natural gas, which he called the most ecologically friendly fossil fuel.

 
Gas prices have dropped sharply because of decreased demand and surging American production. Unlike oil prices, which rebounded at least in part because of cuts in OPEC’s production quotas in the end of 2008, gas prices have not seen any similar gains.

 
“Forecasts are rather worrying,” Khelil said at the opening of the forum. He said he didn’t expect international demand to reach 2008 levels – before the global economic meltdown – before at least 2013.

 
Current prices, at about $4 per million British thermal Unit (BTU), are about 20 times lower than oil. Traditionally, natural gas is only about 10 times cheaper than oil, Khelil says.

 
Analysts have largely discounted GECF’s ability to form a cartel-like bloc, in part because some group members have invested too much and worked too hard to raise production volumes only to see those gains undercut by quotas in a global market where demand patterns have changed dramatically.

 
“The mutual interests between members are indeed limited,” Samuel Ciszuk, Mideast energy analyst with London-based IHS Global Insight, wrote in a research note. Ciszuk said while Qatar is working on boosting its production capacity, shale gas exploration in the U.S. has significantly cut American demand for imported gas.

 
“This is mostly hurting Russia and Algeria, as some of the Qatari volumes earmarked for the United States now will compete for European market shares, where the two countries have previously dominated,” he said.

 
Sheik Abdullah bin Hamad al-Attiyah, the energy minister for Qatar, the world’s largest exporter of liquefied natural gas or LNF, also voiced concerns about low prices.

 
“We must find a mechanism for a just price for gas and to stabilize the market,” he told reporters ahead of the forum.

 
Both Qatar and Russia have stated that reducing exports was not their favored solution. Though output quotas have long been OPEC’s main tool for dealing with price swings, several GECF ministers, including Shokri Ghanem, Libya’s top energy official, and Russia’s Shmatko, resist the idea of turning the forum into a gas cartel.

 
Ahead of the meeting, officials said other price-boosting options could focus on bridging the gap between short-term trading on LNG, and long-term contracts for non-liquified gas. This could mean more closely indexing LNG rates to oil prices.

 
Natural gas was traditionally sold on term contracts of up to 25 years, with the price fixed between the producing country, the oil company working the wells and the consumer country. But the United State and, to a lesser extent, Europe now also buy liquefied gas on “hub” markets that trade short-term supplies.

 
The increase in “non-conventional gas” production in the U.S., however, has hit short-term prices, and Australia’s growing weight in gas output is also expected to further pressure prices. As those prices drop, it provides greater incentive for consumer nations to buy more gas on the short-term market rather than through their traditional partners.

 
Russia’s minister said members of the forum would also try to “solve the conflict between long-term and short-term gas contracts.” Short term contracts provide for much cheaper gas.

 
He said that participants had agreed to “prevent any competition between any type of gas” – a reference to the increasing price gap between liquefied gas and natural gas.