Europe gas demand seen below 2008 until 2017
London, January 3, 2012
European gas demand will remain below 2008 levels until 2017 and the weak outlook could force suppliers like Russia's Gazprom and Norway's Statoil to reduce their gas prices, French bank Societe Generale said on Tuesday.
SocGen said in a research note that it expected year-on-year demand for gas to grow by 2.5 per cent in 2012, compared with a record 9.5 per cent drop in 2011.
"Our model sees gas demand reaching pre-crisis 2008 levels only in 2017 (estimate), which is not positive for gas demand going forward," the bank said. SocGen said the weak demand outlook would put pressure on Russia and Norway to adjust gas pricing models with European customers.
Around 75 per cent of Europe's long-term gas supply contracts with Russia or Norway are based on indexation to oil prices.
With oil prices outperforming the power and gas markets in past years, European companies including utilities have been forced to buy gas at higher levels than they can sell power and gas to their own customers.
SocGen said that the current economic crisis would have a more severe impact than the 2009 crisis on the pricing model of those contracts.
Gazprom is already in arbitration courts with several European companies over its gas prices, and Statoil is due to renew several contracts in 2012.
"As we move into 2012, the market should be focusing on the renegotiations between Statoil and European buyers (and) the current crisis could prompt Statoil to become more flexible and innovative again in terms of pricing," SocGen said.
"We believe Statoil could end up further reducing the assumed 75 per cent oil-indexation for continental buyers in order to boost medium-term demand for gas (as a fuel for power generation). We suspect that after tough negotiations, it could be reduced to 55 per cent from October 2012."
SocGen said that if Statoil reduced the oil indexation in its continental European contracts this year, Gazprom would also have to become more flexible, especially for continental buyers that are able to access spot hub gas.
SocGen said the weak demand outlook meant it had revised its benchmark British National Balancing Point (NBP) gas price forecast downward as Libyan exports increase, following the end of the civil war, and as delayed Russian exports are expected to flow to Europe.
Because of the low demand in 2011, some European buyers delayed contracted Russian gas deliveries from last year into 2012.
"We reiterate our recommendation to sell NBP summer 12 as we expect prices to be held down by an increase in Russian obligations and greater Libyan exports into Italy," the bank said. – Reuters