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An earthquake has shaken the energy world. The source of the seismic event wasn't hydraulic fracking in Texas, however, but a court room in Vienna. The International Court of Arbritration has imposed spot natural gas prices on OAO Gazprom, setting aside the oil-indexed pricing in the Russian company's long-term export contract with RWE AG, the German utility.

The decision is a big blow to Gazprom, which will have to refund a very large sum of money, reckoned by some analysts to be about €900-million ($1.236-billion), representing the excess RWE paid for gas since 2010. The Russian utility has set aside $6-billion (U.S.) to compensate European gas companies who are claiming rebates over the sharp fall in the gas price since the financial crash and subsequent reduction in European gas consumption. These utilities were locked into the standard long-term contracts under which gas has typically been sold in Europe and the Asian market for the last half century. Such contracts stipulate that the customer must take a certain volume of gas priced according to an index of alternative fuels, mainly oil.

Gazprom is already suffering from weak European demand and crimped cash flow, but the court decision is bigger even than the humbling of Russia's gas giant. Gazprom was the world's most aggressive champion of oil-indexed gas contracts, and has fought hard to keep the link to crude, with good reason. By forcing gas consumers to pay an oil-based price, Russia and the major liquefied gas exporters, such as Algeria, Nigeria, Malaysia and Qatar have been able to hitch their wagon to the OPEC cartel and ensure that buyers pay a managed price, a level linked to OPEC's management of the supply of crude oil. The link has been finally broke by the ICC arbitration judges, and their decision will change the world's commodity markets. By extending free and transparent spot gas pricing across Europe and into Asia, the dominance of crude oil in the pricing of energy will finally end, and natural gas will have to find its true price in open markets.

The importance of the RWE-Gazprom dispute was not lost on Vladimir Putin, the Russian president, who as host of a meeting of the Gas Exporting Countries Forum yesterday, trumpeted the virtues of long-term indexation of gas contracts. He said that indexation was "the fairest and most market-oriented" mechanism for pricing gas. It still dominates continental Europe's gas market and causes huge resentment in the U.K. where the NBP (the U.K. equivalent of the Henry Hub benchmark) spot market is frequently driven by imports of oil-indexed gas from the mainland. However, Russia and its fellow exporters, may find that gas buyers are less enamoured of oil indexation. Sonatrach, the Algerian government's oil company, has been forced to accept lower prices in an arbitration case with Edison, the Italian utility owned by Electricite de France.

Gazprom is turning to Asia and, in particular, China for business, having seen its European markets shredded by the recession. However, the utility knows that the downturn has only accelerated a power shift towards consumers, one that was created by technology as well as the discovery of shale gas reserves. Liquefied gas technology has increased the number of potential consumers, while shale gas has boosted the supply of the commodity – two developments that create an almost perfect market. In turning its face to the East, the Russian gas exporter hopes that China will be satisfied with oil-indexed pipeline contracts for the forseeable future. However, China has large reserves of shale, as does California. Add to that exports from Australia and the Middle East, and it cannot be long before an Asian spot LNG gas market emerges. Gas exporters will simply have to get used to the idea that customers can sometimes choose.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .

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