* 92% spot, hub-linked prices in Northwest Europe
* Oil-linked contracts renegotiated during 2005-2015
* 40% of LNG imports into Europe now spot or hub-linked
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Europe saw a significant move to 64% gas hub price indexation in 2015 from 15% in 2005, as gas volumes imported under oil-indexed contracts were replaced or renegotiated, the International Gas Union (IGU) said in a report released Monday.
The 64% of European gas, including Turkey, indexed to gas hubs represented about 315 Bcm in 2015, with 73 Bcm mainly from UK and Dutch production, 224 Bcm from pipeline imports, mainly into Northwest Europe and Italy, while LNG imports accounted for 19 Bcm, half of it flowing to the UK, the other half being largely spot cargoes.
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Conversely, oil-price indexation in Europe slipped to 30% from 78% in the same period. Oil-indexed volumes totaled 146 Bcm, with 114 Bcm gas pipeline and 28 Bcm of LNG imports into Spain, France, Italy, Turkey, Portugal and Greece. The remaining oil-indexed volume (4 Bcm) came from domestic output.
"Europe is one of the regions where the most significant changes in price formation mechanisms have taken place," the report said.
The move to gas competition was initially caused by lower imports under traditional oil-indexed contracts, with take-or pay-flexibility, allowing more imports of spot gas and increasing volumes traded at hubs, IGU said.
Lower hub gas prices also led some European companies to renegotiate some long-term contract terms.
European wholesale gas prices have been pressured by falling oil prices, the expansion of LNG production, and mostly mild winter temperatures, leaving gas stocks healthy for the time of year, while long-term oil-indexed prices moved down at a slower pace.
The supply contract re-negotiations have sometimes led to the introduction of hybrid price formulas, or even a move to 100% hub price indexation, and in some cases, a reduction in take-or-pay levels.
In addition, Europe saw a decline in domestic gas production, notably in the UK, where contracts are mainly oil-indexed. These contracts are being progressively replaced by pipeline and LNG imports, with contracts indexed to hubs.
More than 40% of LNG imports into Europe are now under hub-indexed contracts. In comparison, 31% of worldwide LNG imports are hub-indexed.
However, the change of price formation mechanisms across the European market has not been homogeneous.
Northwest Europe (the UK, the Netherlands, Belgium, Germany, France, Denmark, Ireland and Luxembourg) has seen the most significant change, moving from 27% spot and hub-linked prices in 2005 to 92% in 2015.
In Central Europe (including Poland, Austria, the Czech Republic, Slovakia, Switzerland and Hungary), gas-on-gas competition has increased from almost zero in 2005 to over 56% in 2015, with the changes accelerating from 2012. This move reflected "increased imports of spot gas, often from Germany, and contract re-negotiations," the report said.
The Mediterranean region (including Italy, Spain, Turkey, Greece and Portugal) saw fewer changes, with spot and hub-indexed prices rising from zero in 2005 to 32% in 2015, due to additional spot LNG imports as well as contract re-negotiations in Italy. Italy's Eni and Russia's Gazprom agreed on revised gas supply prices in May 2014 to fully align it with the reality of the market.
In Scandinavia and the Baltics (including Estonia, Finland, Latvia, Lithuania, Norway and Sweden), hub-indexed contracts reached 15% in 2015, driven by Sweden, Norway and more recently LNG imports into Lithuania.
In Southeast Europe (including Bosnia, Bulgaria, Croatia, Republic of Macedonia, Romania, Serbia and Slovenia) only a very small amount of spot and hub-link prices was reported by IGU for 2014 and 2015, and only in Croatia.
Contract re-negotiations seem to be continuing in Europe. In March, German energy company Uniper, a subsidiary of E.ON, reached an agreement with Gazprom for an adjustment to long-term gas supply contract prices, ending arbitration proceedings between the two companies.
Other cases of long-term contract readjustments are still in ongoing arbitration, including those submitted by Shell, Turkish state gas importer Botas, Poland's PGNiG, Denmark's DONG Energy and German utility RWE.
Further declines in European domestic production in the old legacy contracts could also lead to more gas being imported under hub indexation contracts.
Gazprom itself, the main European market supplier, has said it intends to partially move away from its traditional long-term contract system based on oil-indexed prices towards new flexible market-driven tools.
Gazprom started to launch some auctions for near-term delivery in Germany in September and in the Baltic region in March. It plans to sell up to 10% of its gas export volumes via auction in the near future as it tries out new sales mechanisms for customers in Europe.
More changes in pricing mechanisms might also be envisaged via the startup of US LNG exports, some of which will be headed for Europe, with shorter-term contract terms and indexation to the Dutch TTF hub. Portugal became the first European country to import LNG from the US last month.