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UPDATE 2-Poland deal: Gazprom's last Europe gas price battle settled
November 6, 2012 / 9:10 AM / in 5 years

UPDATE 2-Poland deal: Gazprom's last Europe gas price battle settled

* Poland’s PGNiG shares surge, sees profit boost from deal

* Gazprom still faces EU investigation, row over “take-or-pay”

* Other gas suppliers also under contract pressure

* Oil-indexed gas remains more expensive than spot gas price

By Melissa Akin and Marcin Goettig

MOSCOW/WARSAW, Nov 6 (Reuters) - Russia’s Gazprom on Tuesday gave way in the last of its pricing disputes with big European customers, settling with Poland’s gas monopoly PGNiG , although it still faces a European Union probe into its supply contracts.

PGNiG said that its core earnings would rise by 2.5-3 billion zlotys ($776-$931 million) thanks to the deal, prompting a surge of its share prices. Poland uses around 15 billion cubic metres (bcm), or almost 3 percent of EU gas demand a year, most of that from Russia.

European utilities that rely on imports are squeezed as they buy gas under long-term deals with Gazprom or Norway’s Statoil linked to the price of oil while having to sell it to customers at lower retail prices linked to the freely traded spot market.

Gazprom faced a barrage of arbitration suits over prices, and stumped up rebates for Germany’s E.ON and RWE , Italy’s ENI and Edison, as well as Greece’s DEPA.

It paid $4.25 billion under these agreements in the first half of the year.

The concessions mean that other gas exporters - such as Norway, Qatar, Algeria, Libya and Azerbaijan - that rely largely on long-term gas contracts to supply customers in Europe are also coming under pressure to adjust their contracts.

Russia argues that the deals mean that it was able to defend its established pricing model of long-term gas supply contracts against rising customer pressure to price gas off spot markets.

In accepting price cuts Russia is also paying a high short-term price to protect its long-term position as Europe’s dominant gas supplier.

The EU receives around a third of its gas from Russia, but Gazprom is even more reliant on European revenues, with around 80 percent of its gas being sold to Europe.

“This is an important step to restoring the competitiveness of PGNiG’s long-term contracts,” Gazprom’s head of export Alexander Medvedev, said in a statement.

Gazprom said an addendum to its oil-linked contract with PGNiG took into account market prices for gas and refined products for deliveries on the Yamal-Europe pipeline, but left take-or-pay and long-term contract principles intact.


The EU, perennially concerned by its energy dependence on Russia, has launched a formal investigation into the long-term contracts and possible abuse of a dominant market position by Gazprom, mostly in former Soviet satellite states in Central and Eastern Europe.

Gazprom’s long-term contracts remain uncompetitive against the spot market despite the rebates it was forced to concede.

Oil-indexed gas prices cost almost 90 pence per therm, almost 25 pence more than benchmark spot prices on Britain’s NBP gas hub, data from Thomson Reuters Point Carbon shows.

This means that many European customers delay contracted gas deliveries to the latest date possible under their supply agreement.

Should a customer still not take delivery after that date, a so-called take or pay clause comes into effect, which requires customers to pay fines if they take less gas than specified in their long-term contracts.

French bank Societe Generale said in a recent research note that it expected oil-indexed gas supplies to see a lower weighting than spot indexation in the pricing structure of European gas supply contracts by 2014.

Oil-indexed gas pricing began after gas was discovered in the North Sea and the Netherlands in the 1960s and sales contracts were priced against competing heavy fuel oil and heating oil.

In recent years, Gazprom has received payment for unshipped gas in the billions of cubic metres, a boost to its profits which it has referred to as “virtual export,” but customers are increasingly also challenging this pricing model.

In October, RWE Transgas, the Czech unit of Germany’s RWE, won a landmark court ruling stating that a company did not have to pay fines under a take or pay clause.

The CEO of ENI, a Gazprom customer and also an important partner in projects including the South Stream pipeline, a major new export route to southern Europe, has said he was considering not renewing take-or-pay contracts.

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