GECF Decides To Index Gas To Oil To Save Prices

The Russian Energy Minister Sergei Shmatko said that on Monday Ministers from the biggest natural gas producing countries of the world have agreed to work to index gas to oil. However, he did not give any time frame as to when this would finally happen. This decision by the Gas Exporting Countries Forum (GECF) comes in the backdrop of the failure of natural gas prices to register the kind of rebound that oil prices saw in the past few months.

Natural gas has generally been sold under long term contracts. It is believed that without prices going up it will be very difficult to sustain the huge investments required for exploration and production efforts. Oran, a coastal Algerian city saw the representatives of the 11 member states of the GECF get together to find ways of boosting the slumping prices of natural gas. The 11 member states of GECF together represent around 70 percent of the world’s natural gas reserves.

During discussions some members had suggested a cartel-like organization that would be able to influence prices by imposing output quotas, similar to the Organization of Petroleum Exporting Countries. However, the group finally decided to take a different approach. Shmatko said, “All ministers agreed and supported that we continue our efforts to achieve indexing gas to oil.” It must be mentioned here that Russia holds the world's largest natural gas reserves.

Algerian Energy Minister Chakib Khelil, who headed the meeting, said he hoped these decisions would “mark a new era for our organization.” The last two years have seen gas prices plummet by nearly 50 percent primarily due to decreasing demand and increasing American production. The Algerian minister said that the U.S. has largely stopped importing foreign gas and that is a major reason behind plunging prices. “Forecasts are rather worrying,” Khelil said at the opening of the forum. He said he didn't expect international demand to reach 2008 pre-global economic meltdown levels before at least 2013.

The current price of natural gas at about $4 per million British thermal Unit (BTU), are about 20 times lower than oil. Traditionally, natural gas is only about 10 times cheaper than oil, Khelil says. He added, “A new model of cooperation must be devised” to achieve a “stable” gas trade and fair prices that favor long-term investment and guarantee supply. Ahead of the meeting, Sheik Abdullah bin Hamad al-Attiyah, the energy minister for Qatar, the world's largest exporter of liquefied natural gas or LNF, also voiced concerns about low prices. He told reporters “We must find a mechanism for a just price for gas and to stabilize the market.”