GDF Suez SA, France’s largest natural gas company, plans to renegotiate a supply contract with OAO Gazprom next year as Europe moves away from linking the price of the fuel to oil.
The Paris-based company is “constantly” renegotiating its contracts with suppliers, Jean-Francois Cirelli, vice chairman of GDF Suez, said in London. The talks with Gazprom, following an accord last year, is “something for 2015,” he said.
“This year we have few negotiations to be done, but next year there will be more,” Cirelli said yesterday in an interview at the Eurelectric conference. “There is no other solution than to progressively switch to a market-based approach for our long-term contracts.”
European gas buyers tied to long-term contracts with suppliers including Russia’s Gazprom and Norway’s Statoil ASA have sought a link to regional spot rates rather than crude as the two prices diverged when the 2008 crisis curbed demand and made gas available at hubs cheaper. That pushed companies from EON SE to Eni SpA to seek reviews of long-term contracts through talks or arbitration as they incurred losses buying gas at higher oil-linked prices and selling it to customers at lower market rates.
“We have entered since 2010 fundamental changes in the European market,” said Cirelli, who is also president of lobby group Eurogas. “When you have the customers only wanting to pay market-based gas you have to have supply adapted to that.”
The oil-linked price for July is 26.21 euros a megawatt-hour ($10.46 per million British thermal units), according to Bloomberg’s gas contract calculator using the 2014 BAFA proxy. That compares with 18.25 euros on the NetConnect Germany hub and is the biggest premium since 2009.
While the move toward spot-price indexation has in previous years been more visible in northern Europe than in the south, the trend has extended across the continent, Cirelli said.
Eni, Gazprom’s biggest customer, secured new contract terms last month with the Moscow-based exporter, including an “important change in the price indexation to fully align it with the market,” the Rome-based company said at the time. The contract revision with Gazprom will have a “positive impact” of 560 million euros ($760 million) on the operating profit of Eni’s gas and power unit this year, Sanford C. Bernstein estimated in a report on May 23.
EON and Polskie Gornictwo Naftowe i Gazownictwo SA withdrew their arbitration cases against Gazprom when settling price disputes in 2012 while the court proceedings were completed last year with RWE AG, Germany’s second-biggest utility, as the tribunal ordered reimbursement for past payments and a spot-price link in the supply formula.
Utilities typically may seek arbitration if they fail to agree via talks within six months after a price review request, while the proceedings may take as long as two years to get a tribunal decision, Pierre Vergerio, chief operating officer of GDF’s Edison SpA, said May 22. Milan-based Edison expects its arbitrations with Gazprom and Eni to be completed “in a few months,” he said.
Traditional long-term contracts ensure secure supplies because they set annual volumes that the producer needs to meet, Sergey Komlev, head of contracts structuring and price formation at Gazprom, said last month. Long-term, oil-indexed contracts have an intrinsic premium to hub prices due to security of supply, according to Komlev.
“There is a value to this long-term relationship which benefits the two,” Cirelli said. “I am sure that Europe will continue to be based on long-term contracts for a large part of its supply. But what changes is vis-a-vis our customers. Customers are market based and they are paying on the market base, which means the supply must be market based too.”