London — Norway's Equinor is moving its European gas sales increasingly toward shorter-term pricing, with day-ahead indices set to take a greater role in its sales arrangements, company officials said Thursday.
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Equinor said there was a need to adjust its sales approach in Europe to new market realities, including more gas price volatility driven by increasing LNG imports and more intermittent renewables entering the market.
"Traded gas markets are developing rapidly and a key to success will be agility and ability to respond quickly to price fluctuations," Equinor's head of marketing and trading, Tor Martin Anfinnsen, said.
"The demand for shorter-dated indices is increasing and our response is to reflect this development in our trading," Anfinnsen said.
Equinor said it had always looked to evolve its sales arrangements over the years -- moving away from long-term, oil-indexed contracts to more gas-on-gas priced agreements.
Now it is looking to bring shorter-term price conditions into its sales arrangements.
"We are changing how we price into the market again," Anfinnsen said at an analyst briefing in London.
"Through 2020 we are tilting our gas sales toward day-ahead and month-ahead indices with the weighting on the former over the latter," he said, adding the weighting would be roughly two thirds day-ahead and one third month-ahead.
After 2020, Anfinnsen said Equinor's realized European gas price would mostly reflect short-term market indices as demand for long-term indices "fades away".
At present, Equinor has a wider range of pricing indices in its sales contracts, including longer-term indices. But, Anfinnsen said, "the basket of indices we have will roll off through this year."
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Equinor is shifting its strategy because it allows the company to better manage its gas portfolio as shorter-term pricing better reflects spikes in market due to unexpected weather developments, for example.
"We are moving from passive management of the portfolio -- i.e.. you get the value of the gas with the indices you had -- to a more active management," Anfinnsen said.
EU GAS DEMAND
Equinor's vice president for market analysis, Elisabeth Aarrestad, said at the briefing the company was expecting "flattish" demand in Europe in coming years.
"We see a slight decline in the residential, industrial sectors, but combined with an increase in gas-for-power demand," Aarrestad said.
Volatility would likely be driven in 2019 and 2020 by the rate of LNG demand in Asia and renewables penetration in Europe.
"The dark horse will be Asian demand for gas, in particular Chinese demand," Anfinnsen said.
He said while there were signs of a possible global LNG supply overhang, the market has been surprised "to the upside" in previous years.
Nonetheless, expectations were for a "softer" period in 2019-2020, Aarrestad said.
Russia was expected to maintain a stable supply to Europe in coming years, leaving LNG to make up the gap left by falling domestic production.
"Russia has always behaved rationally, and we see no indication of that changing going forward," Irene Rummelhoff, head of marketing, midstream and processing at Equinor, said.
Equinor chief economist Eirik Waerness said: "We assume Russian [supplies] being stable, with LNG taking the swing."
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