Gas producers, buyers square up in pricing deadlock

* 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 buyers are in a standoff over pricing with new long-term deals effectively shelved until the deadlock is broken, as major consumers lined up at a conference this week to vent their frustration.

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

Utilities like RWE , Tokyo Gas and Kogas

say deals fixed to a barrel of crude oil, are outdated, costly burdens.

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

Tokyo Gas, Japan's single biggest importer of oil-linked (LNG), called the global gas pricing mechanism "not rational" in light of cheap U.S. gas exports expected to flood markets by 2016.

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

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

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

For producers, BG Group's outgoing Chief Executive Frank Chapman said LNG would continue to be benchmarked against oil prices for several more decades given Asia's growing dependence on supply from only few foreign gas-producing sources.

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

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

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

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


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

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

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

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

With new 20-year gas supply deals off the table, Russia and Norway are making a tactical grab for Europe's biggest freely traded spot gas market instead, hoping that rising prices will swell their profits, Wood Mackenzie's head of global gas research Noel Tomnay said.

For the first time in years Russia and Norway resumed pumping gas above planned levels to Europe ahead of what they see as sharp price rises between now and 2016 that should push gas 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 to one of a tactical market grab, and I think that's in anticipation of continental price development as LNG disappears," he said.

Gazprom's deal to supply UK utility Centrica with gas priced against spot markets, which it ordinarily opposes, spans a period in which Wood Mackenzie expects gas prices to rise sharply, between 2013 and 2016.

Similarly, Tomnay says, Statoil this year began ramping-up production after years of undershooting official targets.

The urgency and focus on the UK market partly reflects competitive threats posed by major new suppliers including the United States.

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

(Editing by William Hardy)

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