Buying gas through a fixed price agreement with suppliers would not secure the cheapest prices, one of Europe’s leading LNG experts has said.

Instead of the 10-year gas contract favoured by the Government, it would be cheaper to buy the fuel by engaging gas trading companies to hunt down diverted gas shipments, Oxford University’s Howard Rogers told The Sunday Times.

“The smart thing for Malta to do would be to engage an intermediary and use them to pick up gas cargoes at spot prices. Spain, for instance, is finding itself having to divert many gas shipments away. But if you go straight to somewhere like Qatar, they’ll try sell gas at higher oil-indexed prices,” Prof. Rogers, who heads the gas research division at the Oxford Institute for Energy Studies, said.

The Government has said that it would look to lock-in gas prices through a 10-year fixed price agreement. Under these types of agreements, common within European and Asian gas markets, liquefied natural gas prices are indexed to the price of oil.

But the long-standing tradition of tying gas prices to those of its sister resource is gradually being eroded by more flexible pricing structures. That shift has already happened in the US, where gas suppliers compete against one another in price. A glut of shale gas discoveries, coupled with sluggish demand due to the recession, have pushed LNG prices there to one-quarter of what they were in 2008.

According to Prof. Rogers, European gas markets are currently undergoing a similar transition, with recession-pressed European countries starting to question the oil-indexed gas contracts they have with Russian and Norwegian suppliers, their heads turned by cheaper spot-price gas imports.

“Since the recession there’s been a move away from oil indexation in Europe, and about half the gas is bought at spot prices,” he said. “Demand was down because of the economic slowdown, and you suddenly had a surge of LNG supplies from places like Qatar.”

Much of that gas was destined for North America. But when shale gas took off there, suppliers suddenly had to find a new buyer for their product – leading to a gas glut in Europe.

Further east, the stage is set for an ideological tug-of-war between LNG importers China and Japan on one hand, and Australian gas producers on the other. While gas consumers are eager to take advantage of cheaper spot-priced gas, Australian investment into LNG production totalling an eye-watering €180 billion is based on the assumption of oil-indexed gas prices, something producers there will not give up lightly.