Eni now switched terms in 60% of bought natural gas volume

Italian incumbent Eni has managed to renegotiate 60% of its long-term natural gas contract portfolio volume, so the pricing mechanism is more closely aligned to market conditions, the company said on Thursday in its half year results.

This could mean that Eni’s long-term deals are increasingly indexed in European spot gas prices, although this could not be confirmed.

As well as altering the pricing terms of these long-term deals, Eni has also increased the flexibility of many of its take-or-pay clauses.

Eni’s CEO Claudio Descalzi said that thanks to the renegotiation of long-term gas supply contracts, between Q4 2013 and Q2 2014, the gas and power division of the business was likely to break even in 2014.

Overall, Eni posted a profit of €870m for the second quarter of 2014, up 51% year on year. Its gas and power division posted a profit of €40m, against a loss of €227m last year.

The benefits of contract renegotiation were partially offset by weakness in the spot gas market, the company said, as PSV hub prices have declined on structural weak demand and oversupply. Price revisions with long-term buyers of Eni’s gas also had an impact on profits.

The decision by Italian energy regulator AEEG to switch residential customer tariffs away from an oil-linked pricing mechanism to prices indexed to the spot gas markets, was also highlighted as a factor that pressured profits.

Eni expects by the end of 2016 to introduce a more market-orientated pricing mechanism in all of its purchase contracts with suppliers. By 2017 it expects to have clawed around €1.9bn that was previously pre-paid under take-or-pay contracts.

Gas sales

Eni’s gas sales in Europe during the second quarter of 2014 reached 19.1 billion cubic metres (bcm), in line with the previous year.

However, in Italy gas sales increased 12% year on year, totalling 7.3bcm, thanks to higher sales on the spot market. Eni’s gas sales also increased in Benelux and the Iberian Peninsula.

Sales to importers in Italy declined by 49% to 640 million cubic metres, due to lower availability of Libyan supplies, Eni said.

Eni expects its gas sales during 2014 to be slightly lower than 2013.

Despite the on-going downturn in demand and oversupply in Italy, Eni expects to boost its position in both the large customers segment and in the retail segment. Matilde Mereghetti