Prime Minister Victor Ponta announced a couple of days ago he would sent his ministers discuss the gasoline price with the oil companies; this price does not decrease proportionally with the oil on the international markets. Beyond the false problem brought to consideration, not the prime minister, nor any specializing institution in Romania does explain why natural gas isn’t cheaper, as it is closely connected to the oil quotes. On the contrary: while the barrel price is dropping to levels not seen since 2008, below 50 dollars, the natural gas in Romania is systematically surging, owing to the market liberalization. In 2014, the Brent oil fell to 50 dollars per barrel and import natural gas was around 380 dollars per 1000 cubic meters. Now the oil slumped below 50 and expectations are even lower, but imported gas is near 360, and the so-called regulated price is approximately 280 dollars per 100 cubic meters.
At least in the European Union, the gas price is known to evolve in a close relation with the oil. For years, when crude quotes were up, gas kept the pace. Suddenly, when the trend reversed for oil, this equation is no longer valid. In 2013, the barrel was around 110 dollars, the gas around 380 dollars per 1000 cubic meters. Now the oil price is half of that, but gas costs nearly the same. Why? To understand the tight connection of the two sets of quote, we propose an older analysis of Energy-Center on the relation between them; it is very actual – for those willing to hear, of course.
A lot of ink was wasted to illustrate the high price of gas imported to Romania, but a lot less to explain the causes. There are sever ways of forming the price of import gas, each with temporary advantages or disadvantages.
1. Indexing vs. not indexing the natural gas with oil
The gas market was influenced by the discovery of the Groningen field in the Netherlands; this was only opened to exploitation after signing long-term contracts and indexing its price with the oil, to guarantee the major investments necessary, and after indexing the transmission tariffs with various negotiated rates (of inflation, currency depreciation, etc.). Thus, the export price of gas in many contracts now depends on the substitute oil price, on the transmission taxes in different transit countries and of the transmission (unbalance) risk costs, without any relation with the gas production or transmission costs, and even more importantly, with the market price in a gas-to-gas competition.
In long-term contracts, the client takes the risk of the amount , while the producer gambles on the price , which they can influence. This system set up in 1962, when there was no gas-to-gas market, resulted in the independence of prices from the supply and demand. Without a market, the long-term contracts had indexing levels to mirror the international oil market.
It is therefore visible that the price of imported natural gas at present does not reflect the actual costs of production and transportation or the market price. Gas is aligned to oil, subjectively, based on indexes in a formula, and transits tariffs are also subjectively indexed with other figures. The situation is similar on Romania’s market, where gas is sold since 2004 in the form of a domestic-imported pool, with indexed prices approved by the National Energy Regulatory Authority, in a subjective manner.
Analyzing the worldwide context, we see that indexing gas to oil is quite infrequent, and this is mostly determined by its application in Europe, where this method was devised.
Contrary to most of the world, in Europe the gas price mostly results from the indexing with the oil price.
Fig. 1. Natural gas price forming worldwide and in Europe