* Gazprom drops take or pay from 2012-2017 domestic supply deals
* State gas company fighting lower cost producers at home
* Domestic competition mirrors challenge in Europe
By Denis Pinchuk
MOSCOW, June 3 (Reuters) - Russia's Gazprom said on Monday it cancelled take-or-pay requirements for domestic consumers in a concession to major industrial clients who have been switching to lower-cost supplies from independent producers such as Novatek.
Gazprom's domestic supply agreements expired at the end of 2012. A spokeswoman for Gazprom's domestic supply division, Mezhregiongaz, said the take-or-pay requirement was excluded from all new contracts, including those that had yet to be fully finalised in negotiations.
The new contracts are five-year deals which expire in 2017. The take-or-pay rule requires consumers to pay for gas whether they take physical delivery or not. In Europe, it is a bulwark against competition from sometimes cheaper spot supplies from rivals such as Statoil.
"Fines for failure to draw gas are completely absent from the new contracts," Mezhregiongaz spokeswoman Maria Frolova said.
Gazprom's domestic gas sales are dwarfed by the take from its exports to Europe, but just when the Russian giant faces more competition in foreign markets it has lost share at home to rivals producing lower cost gas.
The decision to cancel the requirement for domestic consumers has no impact on the key export market, where Gazprom has made price concessions while defending take-or-pay in a European court, but it underlines Gazprom's eroding competitive edge.
Gazprom said its share of the domestic market fell to 73 percent last year from 80 percent in 2008, reflecting rising output of low cost gas from independent producer Novatek and increased sales by oil companies with associated gas.
In a sign that state-owned Rosneft is stepping up its bid to take business from Gazprom at home, sources said last week it would pay $3 billion to consolidate a domestic gas producer, Itera.
Since first buying into Itera last year, it agreed to sell 4.65 billion cubic metres of locally produced gas in 2013-2015 to a power station owned by E.ON, one of several sizeable contracts sealed in the last year between large consumers and non-Gazprom producers.
A number of similar contracts sealed over the past year by Novatek with most of Russia's steelmakers have also eroded Gazprom's share with key industrial customers.
Rosneft has also joined forces with Novatek to lobby for the right to export liquefied natural gas (LNG) - challenging Gazprom's goal of increasing exports of LNG to Asia to reduce its reliance on pipeline gas exports to Europe. (Reporting by Denis Pinchuk; Writing by Melissa Akin; Editing by Louise Heavens)