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Ministers: Index Natural Gas to Oil to Save Prices

Ministers from the world's biggest natural gas-producing countries, worried about slumping prices, agreed on Monday to work to index gas to oil, Russian Energy Minister Sergei Shmatko said.

The push by the Gas Exporting Countries Forum, or GECF, comes as natural gas, which has typically been sold under term contracts, has failed to realize the kind of price rebound registered over the past few months in oil markets.

Producers say higher prices are key to sustaining the kind of investment necessary to continue exploration and production efforts.

The GECF, whose 11 member states represent some 70 percent of the world's natural gas reserves, had come together in this coastal Algerian city to address ways of boosting slumping prices.

Some of the members, who range from Qatar to Russia, had pushed for a cartel-like organization that could influence prices by agreeing on output quotas similar to those of the Organization of the Petroleum Exporting Countries, the oil bloc whose 12-member states account for roughly 35 percent of the world's crude exports.

Instead, they took another approach.

"All ministers agreed and supported that we continue our efforts to achieve indexing gas to oil," Shmatko, whose country holds the world's largest reserves, said, without giving a timeframe for when this could happen.

He also said he was "concerned about the existing idea to impose carbon taxes" on natural gas, which he called the most ecologically friendly fossil fuel.

Algerian Energy Minister Chakib Khelil, who headed the meeting, said he hoped decisions would "mark a new era for our organization."
Gas prices have fallen by nearly 50 percent over the past two years, mainly because of decreased demand and surging 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.

Current prices, 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.

"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, Khelil said.

Analysts have largely discounted GECF's ability to form a bloc with cartel-like abilities, in part because some group members have invested too much and worked too hard to raise production volumes only to see those gains undercut by quotas in a global market where demand patterns have changed dramatically.

"The mutual interests between members are indeed limited," Samuel Ciszuk, Mideast energy analyst with London-based IHS Global Insight, wrote in a research note. Ciszuk said while Qatar is working on boosting its production capacity, shale gas exploration in the U.S. has significantly cut American demand for imported gas.

"This is mostly hurting Russia and Algeria, as some of the Qatari volumes earmarked for the United States now will compete for European market shares, where the two countries have previously dominated," he said.

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.

"We must find a mechanism for a just price for gas and to stabilize the market," he told reporters ahead of the forum.

Both Qatar and Russia have stated that reducing exports was not their favored solution. Though output quotas have long been OPEC's main tool for dealing with price swings, several GECF ministers, including Shokri Ghanem, Libya's top energy official, and Russia's Shmatko, resist the idea of turning the forum into a gas cartel.

"It would be difficult to reduce output as a way to influence prices" because of the way gas is extracted, shipped and sold, Shmatko said earlier.

Ahead of the meeting, officials said other price-boosting options could focus on bridging the gap between short-term trading on LNG, and long-term contracts for non-liquefied gas. This could mean more closely indexing LNG rates to oil prices.

Natural gas was traditionally sold on term contracts of up to 25 years, with the price fixed between the producing country, the oil company working the wells and the consumer country. But the United State and, to a lesser extent, Europe now also buy liquefied gas on "hub" markets that trade short-term supplies.

The increase in "non-conventional gas" production in the U.S., however, has hit short-term prices, and Australia's growing weight in gas output is also expected to further pressure prices. As those prices drop, it provides greater incentive for consumer nations to buy more gas on the short-term market rather than through their traditional partners.

Russia's minister said members of the forum would also try to "solve the conflict between long-term and short-term gas contracts." Short term contracts provide for much cheaper gas.

He said that participants had agreed to "prevent any competition between any type of gas" — a reference to the increasing price gap between liquefied gas and natural gas.

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Ministers from the world's biggest natural gas-producing countries, worried about slumping prices, agreed on Monday to work to index gas to oil, Russian Energy Minister Sergei Shmatko said. The push by the Gas Exporting Countries Forum, or GECF, comes as natural gas, which...
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