A great European war is about to begin. This is a war for natural gas, a struggle for control of the market in this vital fuel.

It is not, though, a fight over market share but something more fundamental: it is about control over the pricing mechanism, the way in which gas is bought and sold in Europe. It is an ideological conflict between promoters of free markets and others who support the stability of a managed price. It is also about the potential profits and losses at stake in £19 billion worth of unwanted gas.

The wholesale gas price has collapsed worldwide. It has been beaten down by recession and at the same time undermined by new discoveries in America and new supplies of sea-borne liquefied natural gas from the Gulf.

Households don’t see this in their bills but industrial buyers of gas have watched the spot or “day ahead” price fall from 70p per therm to about 20p over the past 12 months. One of the reasons your bill isn’t falling is that most of your gas was bought by a utility, not on the spot market but under a long-term contract with a big energy group.

It is these contracts, some as long as 30 years, that are now the subject of a tug-of-war between the world’s biggest companies. Europe’s gas buyers are not just demanding lower prices, they are looking to rewrite deals. They want to link long-term prices more closely to spot markets and they want the big gas suppliers in Siberia, the North Sea and North Africa to take more price risk.

The conflict erupted last week at the World Gas Conference when Alexey Miller, the chairman of Gazprom, flatly denied that his company would renegotiate prices or volumes. At the same time Wulf Bernotat, chief executive of E.ON, Gazprom’s biggest customer, said he was in talks over the deferral of unwanted volumes of gas.

In one corner, stubbornly, sit the suppliers — troubled giants such as Gazprom of Russia, Sonatrach of Algeria and StatoilHydro of Norway. These mainly sell gas through long-distance pipelines under “take-or-pay contracts”. These deals, sometimes linked to the entire output of a big gasfield, require purchasers to take specified annual volumes of gas. If they don’t take all the gas, they must pay for it anyway and the volume declined can be supplied later when demand for the fuel increases. The take-or-pay price is almost always linked to an index, made up typically of a basket of alternative fuels related to crude oil.

Take-or-pay was invented to provide stability in a simple world made up of single buyers and monopoly sellers — Russia selling gas to Germany or the old British Gas buying from Shell. Gas trading did not exist because there was no organised market. Shell needed the certainty of a guaranteed customer to justify the cost of drilling wells and building pipelines. British Gas wanted a reliable supplier and both sides wanted a certain price.

In the other corner, fuming, sit today’s buyers — companies such as Britain’s Centrica, E.ON of Germany, Italy’s ENI and GDF-Suez of France. They see the price of spot gas plummeting in liquid markets such as the NBP in Britain, at Zeebrugge in Belgium and America’s Henry Hub, but they have already bought gas from Russia at a gas price linked to oil, which remains stubbornly high.

Put in simple terms, today’s UK spot gas price of 26p per therm translates into an oil price of about $24 per barrel, compared with today’s crude price of about $75 per barrel.

According to Louise Boddy, of Icis Heren, the gas price consultants, the oversupply of take-or-pay gas is so large that utilities are dumping gas they cannot sell into the spot market and into storage. “Utilities are praying for a cold winter,” she said. “Otherwise they will have to sell gas at a loss or take contractual penalties.”

The problem will continue, says Simon Blakey, a gas expert at IHS-Cera, the energy consultants.

He reckons demand will remain below minimum contracted volumes into 2011. That means Europe could be working through its gas glut well into 2014-15.

Italy is squabbling with Russia over some $2 billion worth of contracted gas for which it has no customer, and if the glut, as expected, lasts three years, the whole of Europe is arguing about liability for a gas bubble worth $25-$35 billion at current prices. For Gazprom, it is a growing nightmare, compounded by the group’s enormous financial commitments to build pipelines in the Baltic and giant gasfields in the Yamal Peninsula and in the Barents Sea.

Money talks and Gazprom cannot ignore the convoys of ships from the Gulf, Egypt and Nigeria, dumping liquefied gas into tanks at Zeebrugge, the Isle of Grain and Milford Haven at prices that are half the cost of Russian take-or-pay gas.

For the Kremlin, it will be hard to accept that its biggest export earner, the nation’s No 1 taxpayer, should be subject to the daily whims of traders watching screens in London. Gazprom will put up a huge fight to prevent any linkage to spot markets and many outside Russia will wonder whether gas, the fuel that underpins Europe’s energy future, should become a trader’s plaything.

Many years ago in Britain, a great company almost collapsed when a new, liberalised market undermined the value of gas bought under old take-or-pay contracts. The company’s name was British Gas.

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