Piped gas and LNG are seeing ever greater diversity of pricing; what is the GECF's position on the development of gas and LNG prices?
Although the global gas market has been evolving towards an increased share of spot pricing, driven by a continuous push from consumers for more gas-on-gas pricing, we believe the global spot market is insufficient to support this pricing mechanism as the bulk of gas and LNG sold is on an oil-indexed pricing mechanism under long-term contracts. The oil-indexed pricing mechanism ensures the security of supply for consumers and is generally less volatile than gas-on-gas pricing. Historically, gas-on-gas pricing, which follows the fundamentals of supply and demand, could result in price fluctuations without control when supply or peak demand changes.
Gas projects are highly capital-intensive, and low and volatile gas prices could affect project economics and lead to a decline in investment, which has been observed post-2014. As such, traders and marketers of gas prefer the oil-indexed pricing mechanism as it allows a sustainable revenue stream based on a reliable index. However, in some markets, they may use competing or replacement fuels as an index for gas pricing. There is an important need for a risk-sharing approach for oil and an oil products-indexation pricing mechanism in long-term contracts to ensure there is timely investment in the gas value chain.
Lastly, the oil-indexed pricing mechanism is a win-win mechanism as it guarantees a stable gas market and security for all parties involved in the gas business: suppliers, buyers, investors, infrastructure companies and banks.
As far as the GECF is concerned, it does not intend to set or influence the prices. Moreover, our long-term strategy emphasises co-operation as a core value of the GECF in accordance with its statute. Such co-operation could be reflected through common approaches for investment and technology, including technological research and development that stimulates gas demand, sharing of best practices and lessons learnt, support of security of supply and demand, and adoption of principles of equitable risk-sharing among the relevant stakeholders.