Economic Report 2013

Figure 3 shows how day-ahead prices rose at the NBP in late 2012 and into 2013, having been steady throughout 2011 and much of 2012, as winter’s higher demand and the arrival of fewer LNG cargoes took effect. The cold end to the winter 2012-13 put considerable strain on storage stocks and caused the largest flows ever through the Inter-Connector pipeline between Belgium and Britain, with more than 70 million cubic metres per day flowing on a number of days. This clearly demonstrated the value of an open and competitive market at the NBP and how important the liberalisation of the EU’s market in gas is. It would be difficult to imagine such flows occurring at short notice without the benefits of liberalisation. In contrast, US gas prices, while rising slightly, have remained at a substantial discount to those in Europe, with all the competitive advantages this entails for the USA’s economy.

Within mainland Europe, several buyers have successfully challenged the operation of the oil indexation of prices under long-term contracts and obtained discounts as a result. Nonetheless, it would appear as though the underlying pricing structures mostly remain in place, albeit with the formula having been adjusted to reflect more closely open market conditions at the trading hubs. However, it is understood that many long-term Norwegian gas supply contracts have been re-negotiated to reflect market conditions. According to the European Commission, about half of the EU’s gas consumption in 2012 was supplied under oil indexed contracts, with north-west Europe being considerably more liberal (about 70 per cent open market pricing) than central Europe (less than 40 per cent). The story of oil indexation and its expected decline in the EU would appear to have further to run, therefore.

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ECONOMIC REPORT 2013