Natural gas: Things used to be simple for gas producers. Customers were eager to secure long-term contracts. Pipelines — in which the buyers invested alongside the producing countries — were the only way to transport gas. Quantities were known long in advance, with prices indexed to the price of oil. And save for the occasional turmoil in the Middle East and Central Asia, or the traditional winter dispute between Ukraine and Russia, stability was the norm.
No longer. A spot market for natural gas has emerged, reflecting the diversification of producers and the rising trade in liquefied natural gas (LNG) — which can be transported in tankers instead of pipelines. Unlike the contract price, the spot gas price hasn’t followed oil. Since the beginning of the year, prices are down 40 per cent, while oil is up almost 50 per cent.
The current bear market in gas may not last. Winter is coming, increasing demand. And record low prices could lead recent relatively high-cost fields to cut production.
But the large and unexpected disconnect does raise a serious question, even for European buyers, which rely almost exclusively on traditional long-term gas contracts with Russia, Algeria and Middle Eastern producers. Will the price of a British thermal unit of gas continue to fluctuate alongside that of a barrel of oil? Oil and gas analysts diverge on whether the disconnect is here to stay. Those who think so argue that the two sources of energy cannot always be substituted for each other. As technology advances, and as LNG grabs a larger share of the market, the gap could become permanent.
At the very least, Russia and other big producers are likely to face customers who will want to move away from strict oil indexation. It may take a few years in Europe, where the ingrained culture of state monopolies is comfortable with current arrangement. But at some point, a more volatile market will herald the end of predictable harmony, adding yet more uncertainty to resource-dependent economies.
