Global Gas Service Oil Indexation Briefing. (GW)
The beginning of the end for oil indexed long term contracts?
Oil indexation has traditionally dominated long term gas contracts in both Asia and Europe, but its relevance has been brought into question by the prevailing global gas over-supply. While it is widely recognised that sellers are keen to retain oil indexation our analysis suggests, perhaps surprisingly to some, that many buyers and policy makers will struggle to be weaned off oil indexation. Consequently our expectation is that oil indexation will remain the backbone of long term contracts in Asia and Europe for some time, although notably at oil indexation levels lower than recent historical norms.
In much of Asia gas still substitutes for oil products, particularly in China and India where the industrial and residential/commercial sectors are driving gas demand, supporting oil indexation. In addition there are other reasons why Asian buyers are reluctant to move significantly away from oil indexation. These include the predominance of pass through pricing regimes, the fragmentation and conservatism of buyers, the lack of an Asian hub price, the unfamiliarity with Atlantic spot price risk and the strong current desire to launch new Pacific LNG supply projects. However, we do expect more short term supply contracts into the Pacific to include indexation to Atlantic hub prices as Atlantic LNG suppliers seek Pacific market options over the next few years.
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