Oil Price Volatility – Risks And Opportunities In 2015: Update 11

Update 11 - The Effect On Gas Pricing Disputes

The phenomenon of "price review" and "price reopener" disputes - whereby a party seeks to adjust the pricing basis under an existing long term gas sales contract - has for a number of years been the subject of lively discussion in energy and arbitration circles. As participants at the GAR Live Energy Disputes event (held at Clyde & Co's London headquarters in May) appeared to agree, the lower market, particularly if it persists is likely to affect buyers and sellers in new ways.

Two short to medium term impacts seem likely: the first upon those already involved in gas pricing disputes, the second on sellers who now feel aggrieved that their oil-linked gas is being sold too cheaply. Meanwhile global demand for gas continues to increase, which is likely to feed market volatility - and provoke further pricing adjustments - over the medium to long term.

Background

Global natural gas consumption has risen quickly over the past 35 years; however the contracts under which it is bought and sold have been slower to change. Unlike oil, natural gas prices still show considerable regional variation. At the time of writing, the price of natural gas at a major US pricing point, Henry Hub, is about US$2.80/MMBtu. In Europe it is nearer US$7/MMBtu, while cargoes in Asia are presently changing hands for only slightly more, having fallen (along with oil prices) from a high of around $18/MMBtu in the middle of 2014.

One reason for these disparities is historical: in Asia natural gas is typically sold under long-term contracts indexed to oil prices. In the US, particularly with the advent of shale gas, there is more of a spot market. Over time, oil-linked prices and spot prices have moved apart and, though the amount of gas sold on a spot basis has increased in the past 5-10 years, many long term oil-indexed contracts remain. This has left parties to long term contracts wondering whether they could get better deals elsewhere and has led to a series of high value but typically low profile disputes as buyers and sellers vie to achieve a "fairer" price.

Italian multinational oil and gas company Eni, for instance, has reached agreements with suppliers including Gazprom, Sonatrach and most recently Statoil of Norway which have resulted in significant reductions to the price Eni pays for gas. While Eni was able to reach a deal with Statoil before the appointed arbitration tribunal reached a final decision, fellow...

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