GASAG moves away from long-term oil-indexation
Germany's largest local utility GASAG is completely moving away from long-term oil-indexed supply contracts, the company's head of trading and sales Henning Borchers said at the Flame gas conference in Amsterdam.
Berlin-based GASAG, which is owned by GDF SUEZ (31.575%), Vattenfall (31.575%) and E.ON Ruhrgas (36.85%), has not entered into a single long-term contract in the last 12 months that was linked to oil prices, Borchers pointed out.
"In the German gas market you just cannot sell contracts that are based on oil any longer," he said. Instead, he added, GASAG has started linking its supply contracts, which now usually run for a relatively short period of 1-3 years, to ICIS Heren's Dutch TTF Spot Index.
"And as soon as there is more liquidity at the German hubs, we will use NCG as the benchmark. We expect this shift towards NCG to happen within the next two years," Borchers added.
He also pointed out that the move away from oil-linked long-term contracts was a reaction to the tough situation on the German supply market, indicating that after a relatively prosperous 2010, the situation has become especially difficult in the first quarter of 2011.
"At the beginning of this year, absolutely nobody wanted to enter new contracts," he said, adding that GASAG, however, expects the situation to improve in the second half of the year.
Many German companies are facing problems with their take-or-pay commitments in established long-term oil-indexed supply contracts, which forces them to buy gas at levels well above hub prices.
Only last month, Germany's incumbent RWE confirmed it had launched arbitration procedures for some of its long-term contracts (see ESGM 20 April 2011).
It is only one of several contract discussions that has reached breaking point recently, with buyers' desire for greater price and volume flexibility meeting ongoing resistance from producers.
Earlier in April, for instance, German utility Bayerngas saw its case for price adjustments in long-term deals dismissed against supplier WINGAS - a joint venture between Wintershall and Gazprom (see ESGM 6 April 2011).
In February, Germany's E.ON also applied to Gazprom asking to fully switch to spot prices for gas supplies in long-term contracts. Gazprom declined the request, but negotiations are still ongoing. (see ESGM 21 February 2011).
According to ICIS Heren data, the average long-term gas contract delivered from Russia into Germany stands at about €26.38/MWh - notably higher than spot levels.
The ICIS Heren NCG May '11 Index settled at €23.321/MWh. JR
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