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Gas producers, buyers square up in pricing deadlock

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* Tokyo Gas says oil-indexation "not rational"

* Asian importers pin hopes on U.S. exports

* LNG eroding sustainability of oil-links

* Russian, Norway make tactical grab for spot hubs

By Oleg Vukmanovic

LONDON, Oct 12 (Reuters) - Gas producers and utility buyersare in a standoff over pricing with new long-term dealseffectively shelved until the deadlock is broken, as majorconsumers lined up at a conference this week to vent theirfrustration.

Producers have defended selling liquefied natural gas (LNG)linked to oil prices amid a growing backlash by consumercountries who want the fuel to reflect over supplied andcomparatively cheap gas markets.

Utilities like RWE , Tokyo Gas and Kogas

say deals fixed to a barrel of crude oil, areoutdated, costly burdens.

Producers BG Group , Russia, Norway and Qatar regardthem as cornerstones of the business.

Tokyo Gas, Japan's single biggest importer of oil-linked(LNG), called the global gas pricing mechanism "not rational" inlight of cheap U.S. gas exports expected to flood markets by2016.

Top LNG importer Japan amassed a record trade deficit in thefirst-half this year partly due to a surge in oil-indexedimports following the closure of nuclear power plants after theFukushima disaster in March 2011.

Tokyo Gas Executive Vice President Shigeru Muraki saw U.S.LNG exports fetching about $9-$10 a million British thermalunits (mmBtu) in Japan were regulators to allow U.S. firms toexport its shale gas resources.

"The current price linked to oil is $17/mmBtu so if shalecame that would bring significant change," Muraki said, pointingout that low prices would spur Japan's demand to 90-100 milliontonnes, versus about 85 million tonnes forecast for this year.

For producers, BG Group's outgoing Chief Executive FrankChapman said LNG would continue to be benchmarked against oilprices for several more decades given Asia's growing dependenceon supply from only few foreign gas-producing sources.

Chapman, who heads one of the world's biggest LNG tradingfirms, said: "If you want a fully liquid market you must havemany sources of supply and many sources of demand."

Producers have long relied on oil-linked deals to easeplanning for major investments and avoid volatile price swingson what had been a very limited spot gas market in Europe.

Centrica Director of LNG Ian Wood said risingliquidity at Europe's freely traded gas hubs, driven by more LNGsupply sold on a spot basis, has boosted the credibility of thehubs as a possible substitute index to oil for long-termcontracts.

"LNG is adding to liquidity and the key for me is that willforce greater and greater hub pricing in long-term LNGcontracts," Wood said.

MINISTRIES WORRIED

The row has spiraled to the level of government ministrieswho are putting pressure on LNG and gas suppliers and buyers toditch the oil-link.

"The Japanese government is saying to its utilities: If youdon't start paying for LNG like the rest of the world we'regoing to start introducing competition," Wood said.

The European Union has also launched a probe into Russia'sGazprom amid allegations that it is hindering the freeflow of gas across Europe and overcharging customers.

With neither camp backing down, the future of long-termcontracts remains in limbo, as utilities attempt to stick it outuntil burdensome deals start expiring from 2020.

With new 20-year gas supply deals off the table, Russia andNorway are making a tactical grab for Europe's biggest freelytraded spot gas market instead, hoping that rising prices willswell their profits, Wood Mackenzie's head of global gasresearch Noel Tomnay said.

For the first time in years Russia and Norway resumedpumping gas above planned levels to Europe ahead of what theysee as sharp price rises between now and 2016 that should pushgas prices above oil-linked levels, Tomnay said.

"Norway and Russia are grabbing more spot market in the UK,"Tomnay said.

"Their approach is changing from one of supply restraint toone of a tactical market grab, and I think that's inanticipation of continental price development as LNGdisappears," he said.

Gazprom's deal to supply UK utility Centrica with gas pricedagainst spot markets, which it ordinarily opposes, spans aperiod in which Wood Mackenzie expects gas prices to risesharply, between 2013 and 2016.

Similarly, Tomnay says, Statoil this year beganramping-up production after years of undershooting officialtargets.

The urgency and focus on the UK market partly reflectscompetitive threats posed by major new suppliers including theUnited States.

"Russia must be looking at U.S. regasification sites asweapons of market destruction pointed at Europe," Tomnay said.

(Editing by William Hardy)

((Oleg.Vukmanovic@thomsonreuters.com)(44 207 542 0014)(ReutersMessaging: oleg.vukmanovic.thomsonreuters.com@reuters.net))

Keywords: GAS CONTRACTS/