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Europe Gas-Market Push Strengthens as Oil-Link Widens

June 5 (Bloomberg) -- European natural gas buyers are pushing to renegotiate long-term supply contracts as the premium of oil-linked fuel to that on hubs rises to the most since 2009.

GDF Suez SA, France’s largest gas company, plans to agree new supply terms with OAO Gazprom next year, Vice Chairman Jean-Francois Cirelli said in a June 3 interview. Gas for next month on Germany’s biggest hub costs 32 percent less than under long-term agreements linked to oil, the biggest gap since March 2009, according to Bloomberg’s gas contract calculator.

More than 50 percent of Europe’s agreements are now linked to hub prices, according to Cirelli. That has helped boost trading on regional hubs, with German volumes gaining 42 percent last year and buying and selling in the Netherlands climbing 10 percent, according to Trayport Ltd. data.

“If there’s more gas market-indexed, on the hub, it will increase liquidity of the hubs and facilitate the development of the market,” he said in London. “We have entered since 2010 fundamental changes in the European market. Until 2009-2010 there was U.K. market-based and continental European oil-indexed. That is over.”

The oil-linked price for July is 26.17 euros a megawatt-hour ($10.44 per million British thermal units), according to the Bloomberg calculator using the 2014 BAFA proxy. That compares with 17.73 euros on the NetConnect Germany hub today, according to broker data compiled by Bloomberg. The oil-linked price was last lower in January.

Revisions, Refunds

European buyers tied to long-term contracts with suppliers including Gazprom and Norway’s Statoil ASA have sought a link to spot rates rather than crude as prices diverged after the 2008 crisis curbed demand. German month-ahead gas has fallen 32 percent over the past year while Brent crude gained 4.9 percent. Agreements linked to oil can last as long as 35 years in a method that dates back to the 1970s, when the fuel was more widely used in power generation.

Buyers from EON SE to RWE AG have won price revisions with suppliers through talks or arbitrations after they posted losses selling gas into domestic markets. Eni SpA, Gazprom’s largest client, renegotiated a contract with the Russian firm last month, a move Stanford C. Bernstein said would boost operating profit at its gas and power unit by 560 million euros ($760 million).

Eni’s new terms prove Gazprom is “ready to compete in the new European gas market, where prices are now mostly spot based,” Societe Generale SA said today in a report.

“If you are a buyer under long-term oil-indexed contracts, bankruptcy is not far from the center of your mind,” Howard Rogers, director of gas research at the Oxford Institute of Energy Studies, said last month in Amsterdam. “If that rebate goes, you are buying high and selling low. It’s very difficult for buyers to play that game and win.”

Supplier’s Risk

Traditional long-term contracts ensure secure supplies as they set annual volumes the producer needs to meet, Sergey Komlev, head of contracts structuring and price formation at Gazprom, said last month. Oil-indexed prices aren’t always higher than those on hubs, according to Anne-Sophie Corbeau, a senior gas expert at the International Energy Agency.

“It’s a firm obligation on our side to deliver and if we don’t deliver, we have to pay huge fines,” Komlev said at the Flame conference in Amsterdam. “If you have hub prices, the risk of the supplier is increased and in order to make risk more or less balanced, you will have to get an option not to deliver if you don’t like the price.”

Gazprom has had scheduled renegotiations with all of its clients and doesn’t expect extraordinary reviews, Andrei Zotov, deputy head of the department for economic assessment and pricing, said on an April 29 call.

Irreversible Process

There’s not enough market transparency on hub trading for the data to be relied on for contractual purposes, Zach Allen, president of Pan Eurasian Enterprises, said today by e-mail. Changing that would require all transactions to be put through an exchange where there’s open and public access to volumes and price data, he said.

Gas trading on Germany’s NetConnect and Gaspool climbed to 2,242 terawatt-hours last year as volumes on the Dutch Title Transfer Facility rose to 8,290 terawatt-hours, according to Trayport, which compiles data on broker bilateral, broker-cleared and exchange-executed trades.

“The liberalization of the market is an irreversible process,” Rune Bjoernson, a senior vice president at Statoil, said last month in an interview at Flame. “We need to believe in the price, that there’s enough liquidity for us to use it in these large contracts. Therefore we have changed it and long-term I think it’s the only sensible approach.”

To contact the reporters on this story: Isis Almeida in London at ialmeida3@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Rob Verdonck, Dan Weeks

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