European spot gas prices have risen sharply since late July, increasing 17% to USD 339/kcm (USD 9.6/mmbtu). While that is still some 15% below reported boarder prices for oil-linked gas it is certainly closer than it has been for much of the summer.
The latest spurt in price since the end of August has been linked to extensive anticipated gas pipeline maintenance in Norway and news that two of Qatar’s 7.8mmte/a LNG trains are also going down for maintenance in September.
In any event, we believe that demonstrates the potential sensitivity of spot prices to any suggested tightening in the market. We continue to anticipate that falling LNG supplies to Europe, as producers sell more non-contracted LNG to firmer markets in the Far East and elsewhere, together with the seasonal jump in winter demand, might yet see more sustained strength in spot prices relative to oil linked prices than was the case last winter.
That may or may not have a bearing on the way the EU handles its relationships with major gas suppliers to EU member states. The European Commission (EC) has just opened formal proceedings to investigate whether Gazprom might be in breach of EU anti-trust legislation for reasons that include whether it ‘may have imposed unfair prices on its customers by linking the price of gas to oil prices.’ In our view, this continues to demonstrate the strained relationship between the EU over purchases of Russian gas - it has not initiated similar proceedings against Norway, Algeria, Libya or some LNG suppliers, all of which sell gas to EU member states under oil-linked contracts.
The EC has publicly stated its concerns over its lack of formal direct influence over contract terms agreed between private entities such as those which govern most gas contracts. Moreover, the EU’s green agenda is under threat as coal is currently displacing gas in European power generation and it would of course like to see cheaper energy prices.
While issues around destination clauses have fallen foul of EU competition law, the extension to a widespread and broadly accepted industry pricing basis in and beyond the EU would no doubt result in stiff opposition from all the affected suppliers, we expect.