* Almost two thirds of Europe's gas still linked to oil prices
* Norway, UK and Netherlands lead spot indexation
* Russia, North Africa remain dominated by oil link
* But trend is shifting towards spot indexation
By Henning Gloystein and Oleg Vukmanovic
LONDON, Feb 22 Europe's natural gas supplies are still mostly paid for by contracts that are linked to the price of oil, despite moves by utilities to switch payments towards prices based on openly traded gas hubs, Reuters research shows.
Europe's natural gas suppliers have traditionally sold through long-term deals linked to oil prices, which are relatively high. Power companies want more flexible pricing based on spot gas markets.
Several analysts and banks have recently said that over half of Europe's gas supplies are already being sold on spot-market terms.
Based on data accumulated from gas supply companies, energy consultancies and Reuters research, however, only 34.8 to 37.7 percent of all major European gas supplies are now priced off openly traded hubs such as Britain's National Balancing Point.
"The 35 percent figure is closer to the reality of Europe's gas market today, while gas supplied on a spot basis was between 25 and 35 percent last year," David Cox, managing director of London Energy Consulting, said.
This means that around two thirds of supplies remain under increasingly unpopular oil-indexation contracts (see table).
Norway, one of the region's top gas suppliers, is switching its marketing model and sells almost half of its gas to Europe on a spot market basis. But most major suppliers such as Russia, Qatar and North Africa continue to rely predominantly on oil indexation.
Only suppliers in Britain and the Netherlands, where Europe's two leading gas trading hubs are located, already supply most of their gas on a spot basis.
Britain's gas output is priced entirely according to spot market rates with the exception of a few ageing offshore fields, where supplies are linked to the cost of crude oil.
Analysts point out that it is difficult to judge exactly how much gas is sold under spot or oil links, since the volumes vary even within one deal.
"I am not sure how to address a partial spot indexation, when both oil and spot gas prices are included into the price formula of a long-term contract," said Mikhail Korchemkin, executive director of Eastern European Gas Analysis.
MARKET IS SHIFTING
While oil indexation still dominates Europe's gas supply contracts, the market is shifting in favour of spot pricing.
"If our CEO signed a new long-term gas supply deal that was linked to the oil market today, he would lose his job tomorrow," one management source at a major German utility said.
Around half of Europe's long-term gas supply contracts, which can extend up to 25 years, are up for renewal between 2018 and 2020, sources say.
"The (spot) proportion is rising each year because of renegotiations," London Energy's Cox said.
Others said the proportion of spot-indexed gas being sold into Europe was far higher.
"The trajectory over the (past) five years shows that if this trend is continued - which we believe it has been - the share of hub based gas exceeded 50 percent either last year or at the latest will do so this year," said Jonathan Stern, chairman and senior research fellow from the Oxford Institute for Energy Studies.
Stern added that the share of gas sold on a hub basis between 2005-2010 rose from around 15 percent to 42 percent, citing country data collected by the International Gas Union.
In a move to win market share, Norway's Statoil, Europe's second-biggest gas supplier after Russia's Gazprom , was the quickest of the non-EU suppliers to move more gas to the spot market and expects these sales to increase.
To address the market share decline, Gazprom made price concessions worth billions of dollars in 2012 and has said it will give further rebates on long-term deals this year, although it is still holding on to oil indexation as its main model.
The Russian company says the share of spot prices in its contracts is around 7 percent, although some deals have up to 16 percent based on spot.
Analysts say Gazprom must do more to regain lost market share.
"To argue that pricing based on supply and demand is a fundamentally flawed concept and that gas prices should continue to be based on that of a completely different commodity is an untenable analytical position," the Oxford Institute for Energy Studies said in a research paper published this month.
Oil-indexed pricing dates back to the 1960s, when gas competed more with heavy fuel oil and heating oil.