Page 6 - FSUOGM Week 48 2021

FSUOGM COMMENTARY FSUOGM

East Europe fares better

than West in gas crisis

thanks to pricing terms

Those European countries that have been slower to reform their gas polices
in line with EU norms have faired better during the crisis

EUROPE LED by the EU, Europe has made a concerted Gazprom, by far Europe’s largest single gas sup-
push over the years towards greater natural gas plier. The company estimates that the share of
WHAT: market liberalisation, and this has involved a oil indexation in its sales dropped from 78% in
European countries shift from longer-term supply contracts and oil- 2005 to 22% in 2019. An antitrust investigation
relying on oil indexation linked pricing to shorter-term deals and gas hub several years ago even forced Gazprom to offer
are fairing better than prices. That has lead to a gas crisis this winter as more flexible terms in its contracts with Euro-
those using gas hub a perfect storm of surging post-corona demand, pean buyers.
pricing in their supply falling EU gas production, a Russian supply The situation has now dramatically reversed,.
contracts. crunch due to its own high domestic demand for In late October, the IEA estimated that EU coun-
gas and high prices for LNG in Asia drawing off tries would be paying around $30bn more for
WHY: the swing supplies that have combined to send gas in 2021 alone than if they had stuck with
Oil indexation currently gas prices in Europe soaring. oil indexation, giving up almost half the gains
provides lower prices But while the continent’s gas consumers have reaped in the last decade. The consensus is that
than hub pricing. reaped rewards from the reforms to the mar- high prices will continue into next year, causing
ket for much of the past decade, saving them- the cost to rise even higher and possibly leading
WHAT NEXT: selves tens of billions of euros in the process, the to a net deficit as all the gains of the last decade
Oil indexation could grow changes have come back to bite them now. Those are lost.
popular following this that have kept oil indexation in their supply con- While spot prices in European wholesale
crisis. In the meantime, tracts have faired better than those that have not, markets are far higher, with the front-month
Europe is bracing for a instead moving to hub pricing. contract at the Dutch TTF hub surging to nearly
difficult winter. Not all European countries have been $2,000 per 1,000 cubic metres in October. That
affected the same by the current supply crunch. is an enormous increase when compared to
While many in northern and western Europe Gazprom’s contacted gas, which the company
that fully embraced price liberalisation are now reported this week it sells on average for only
contending with an unprecedented spike in their $313.4 in Europe during the third quarter. Gaz-
gas import bills, others in east Europe and less prom’s prices are typically set according to hub
aligned with EU energy policy are faring com- rates over a longer period, as well as being in
paratively better. some cases indexed to oil. But this still represents
Europe relies more on hub-based, or gas-on- a growth from only $143 in 2020, when demand
gas pricing than anywhere else in the world now, was subdued by the pandemic, and the average
which helps explain why it has been hardest hit price in 2019 was a mere $210.6 per 1,000 cubic
by the current energy crisis. The International metres.
Gas Union (IGU) estimates that gas-on-gas
pricing accounts for over 80% of supplies there, Oil indexation versus hub pricing
and this is largely down to efforts by Brussels. EU The way that gas is priced has been through a
authorities view the liberalising of gas prices as small revolution in the last few years. Previously
a core energy policy and have encouraged gas the problem with pricing pipelined gas was
customers to push their suppliers for less oil there was no market: the deal consisted of the
indexation and more hub-based pricing. And producer that puts the gas into the pipeline and
this strategy has clearly paid off. the buyer who takes it out. With only two parties
The International Energy Agency (IEA) in the deal there could be no competition and no
estimates that the EU saved some $70bn in gas market to set a competitive price.
import bills over the last decade by moving The advent of LNG has changed all that,
away from oil indexation and towards hub pric- which can be sent on a ship to the highest bid-
ing. This has primarily come at the expense of der, creating a market-based price for gas and

P6 www. NEWSBASE .com Week 48 01•December•2021