World Energy Outlook 2006

Box 11.1: Contractual Links between Oil and Gas Prices
The share of term contracts (as opposed to spot deals) in wholesale or bulk
gas supply varies considerably across regions. Although spot trade has been
growing, it remains small in most regions. The share is highest in North
America, Great Britain and Australia. In other regions, almost all gas is
traded under term contracts of varying lengths. Precise figures are not
available, as the terms of such transactions are confidential. Gas traded
under term contracts (covering supply over several months or years) can be
indexed against spot or futures prices for gas, crude oil, oil products, coal
and/or electricity. Indexation against general price inflation is also
incorporated into some contracts. Some contracts include indexation
against just one price parameter; others include two or more (for example,
crude oil and heavy fuel oil, or oil and electricity). Many term contracts
– especially in non-OECD regions – have no indexation at all.
Gas prices in term contracts are most commonly indexed on oil prices.
Indexation to other gas prices is confined mainly to North America, Britain
and Australia, because spot gas trade elsewhere is limited and reliable price
quotations are not available. Oil indexation is thought to be used in only a
small proportion of contracts in the United States and Canada, accounting
for well under 10% of the total amount of gas traded in bulk. In continental
Europe, term contracts – often covering very long terms of twenty or more
years – account for well over 95% of bulk gas trade (almost 100% outside
Belgium and the Netherlands). Virtually all of these contracts include oilprice
indexation. In Britain, term contracts – which are generally much
shorter in duration than in the rest of Europe – account for 90% of all bulk
trade. In contrast to the rest of Europe, they almost always price the gas on
the basis of spot or futures gas prices, usually at the National Balancing
Point (a notional location on the grid where gas demand and supply are
assumed to balance). A small number of contracts may have some limited
degree of oil-price indexation. Of total OECD European supply of
534 bcm in 2004, perhaps 80% – or well over 400 bcm – is priced in whole
or in part against oil. It is thought that gas prices are indexed against oil
prices in one way or another in all the long-term LNG supply contracts to
Japan, Korea, Chinese Taipei, China and India. In some contracts, there are
limits on how high or low prices can go. Spot trade, however, is increasing,
especially to Japan.
In other OECD countries, gas prices are usually indexed against oil prices
(solely or in combination with other prices) in import and other bulk
supply contracts. In non-OECD countries, gas consumed domestically is
not usually traded commercially and any contracts that exist typically do
not involve any form of indexation. For example, in Russia – the world’s
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© OECD/IEA, 2007