$90 oil prompts new debate on gas link

Doha: Record oil at more than $90 a barrel has rekindled the debate about a long-established practice of pricing natural gas off oil, but breaking the link is difficult because of the lack of easy alternatives.

Natural gas is much more abundant than oil and is still relatively cheap, but because most gas is sold through long-term gas contracts priced off oil products, a vigorous rally on the oil markets has had an impact on gas.

Some argue gas is still undervalued. Others say gas price rises will erode demand and make power generators turn to the cheaper, but dirtier substitute - coal.

"It is possible to destroy the future of the business by being too tied to an oil index," Michael Corke, senior vice president at energy consultancy Purvin and Gertz, told a gas conference this week in Qatar.

"The power sector will not be well served by an oil index. It is mainly coal, not oil, that is the competition."

Power generation was expected to provide between two thirds and three quarters of future gas demand growth, he said.

To meet that growth, countries such as Qatar have spent tens of billions of dollars developing liquefied natural gas (LNG).

If demand falls short of expectations, that could damage the hugely expensive LNG industry, Corke said.