E.ON and Gazprom settle natural gas long-term contract price dispute

Russia’s incumbent natural gas producer Gazprom and Germany’s energy major E.ON Group signed an agreement on Tuesday that settled a protracted arbitration dispute over the pricing of gas supplied under long-term contract, both companies confirmed.

E.ON expects the settlement to have a positive impact of about €1bn on its half-year results.

The new pricing structure results in an equivalent 10% discount, which is similar to previously announced discounts for other customers in the region, according to an analyst at investment advice firm RMG Research. A Gazprom spokesperson said the RMG Research estimate was about right, and in line with comments made by Gazprom Export CEO Alexander Medvedev in June (see ESGM 20 June 2012).

The E.ON settlement includes a retroactive adaptation of pricing conditions for the price review period since Q4 2010, and includes a small number of contracts that cover a total volume of up to 600 billion cubic metres (Gm³). The contracts run from about 2002 until 2036.

“This is a substantial adaptation of the long-term contracts. There will still be some oil linkage but at a greatly reduced risk exposure,” an E.ON spokesperson said, adding that the structure of the long-term contracts themselves remains intact.

Adjusted basket

E.ON is one of Gazprom’s key partners in Europe, owning a share in the Nord Stream pipeline and a 25% stake in the Russian joint venture for the development of the Yuzhno-Russkoye field.

Gazprom reiterated on Tuesday that the settlement did not include any increased link to spot prices in the formula. Gazprom said that the pricing formula reflects a basket of products which includes coal, and that Tuesday’s agreement had adjusted this formula “slightly”.

However, it is understood that the change does not only include a price discount, but has a structural element too.

In connection with the settlement reached with Gazprom on Tuesday, E.ON has also raised its outlook for 2012.

Apart from the positive effects of the renegotiated long-term gas supply contracts, E.ON, among others, is also taking account of contrary effects resulting from the divestment of its gas transmission company Open Grid Europe as well as lower production volumes in its E.ON E&P business because of the delayed commissioning or the outage of gas platforms.

For the full year 2012, E.ON now expects an earnings before interest, tax, depreciation and amortisation (EBITDA) of between €10.4 and €11bn in 2012 (until now: €9.6bn to €10.2bn) and an underlying net income between €4.1bn and €4.5bn (until now: €2.3bn to €2.7bn).

Short-term push

In March, E.ON announced it had successfully renegotiated its oil-indexed long-term supply contracts with Norwegian producer Statoil, for around 15Gm³ under contract until about 2020 (see ESGM 14 March 2012 ).

E.ON reiterated its commitment to long-term contracts on Tuesday, despite growing opposition to them from some European buyers.

The 2009 financial crisis forced many European buyers of oil-indexed gas into the loss-making position of buying volumes at a higher price than their resale rate.

Some inroads were made in 2009 towards a more commercially viable pricing structure, but despite the introduction of a new spot-gas element to Europe’s long-term gas price escalators, the major part of the overall price was still indexed to oil and oil products. This resulted in a continuing significant dislocation between the spot and long-term contract prices.

Since then, some European utilities suffering losses have been pushing to switch to a pricing mechanism on the purchasing side that more closely matches the mechanism on the selling side.

Growing numbers of end-users are changing their gas procurement strategies to favour short-term (one- to three-year) contracts indexed entirely to gas.

Gazprom is also hoping to come to an agreement soon with Polish gas incumbent PGNiG and German utility RWE, which are the remaining two companies that turned to court arbitration to obtain more favourable pricing conditions with the Russian producer.

Sources within Gazprom said on Tuesday that it has already returned at least rouble 20bn (€485.4m) to European customers under agreements to award retroactive discounts this year. JA