ASSESSMENTS

A Change in Natural Gas Pricing for Europe

Nov 22, 2012 | 10:05 GMT

A Change in Natural Gas Pricing for Europe
Statoil CEO Helge Lund in February 2011

MARK EARTHY/AFP/Getty Images

Summary

The 10-year natural gas deal signed Nov. 20 between Germany's Wintershall and Norway's Statoil highlights a fundamental change in the way traditional natural gas exporters to Europe price their product. The contract, which will account for 6 percent of Germany's annual consumption, is based on spot-market prices rather than on oil-indexation like previous contracts, and it has two significant implications. First, the size and duration of the deal suggests that Germany will continue to prefer long-term contracts from its two largest suppliers, Norway and Russia, the latter of which signed a similar agreement with Germany's E.On earlier in 2012. Second, the move away from oil-indexation confirms a trend of pricing less subject to the volatility of crude oil prices. 

Europe is still far from having a fully liberalized natural gas market, and European consumers will continue to prefer long-term contracts to ensure a stable supply. But changes in the European natural gas market will spur deals across the continent that, like the Statoil-Wintershall agreement, will have markedly different pricing structures. 

Europe can expect long-term natural gas prices with markedly different pricing structures....

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