Mid-stream companies choose hub indexation despite low oil

Record low oil prices have not dampened mid-stream companies’ desire to index long-term supply contracts to hub prices rather than to oil, representatives of a number of European companies said on Thursday.

Speaking at a panel discussion at the European Gas Conference in Vienna, senior management team members from OMV, Edison, BP and ENGIE agreed that renegotiating long-term supply contracts in order to index prices to European gas hubs rather than to oil remained a key priority despite the fact that the price of oil has plummeted in the last two years.

“When prices are aligned it’s no longer about the money, it’s about the principle,” said Philippe Vedrenne, senior vice president of gas supply and asset management for France’s ENGIE.

Vedrenne said ENGIE wants 100% of its long-term gas supply contracts to be indexed to gas, and is negotiating with suppliers to achieve this. He added that the current low oil price should make these negotiations easier. Benchmark Brent crude has fallen from $114/bbl in June 2014 to less than $30/bbl at present.

“We should be able to make a deal, nobody has anything to lose,” Vedrenne said.

Other panel members including Vladimir Drebentsov, head of Russian and CIS economics for BP, added that suppliers had a responsibility to take on price risks in long-term contracts in order to remain competitive, just as the gas buyers took on volume risks when they entered into the contracts.

But ultimately, the mid-stream company representatives argued, renegotiating the contracts was no longer really a matter of ensuring a cheaper price, more of making the contracts fairer.

“We want to buy gas at the price of gas,” said Edison’s chief operating officer Pierre Vergerio.

Vergerio added that although there remains a correlation between oil and gas prices, this was not reason enough to continue to index long-term gas supply contracts to the commodity.

“There are links between gas and many factors – it doesn’t mean we index to them,” he said, giving the example of correlations between price movements at the European gas hubs and movements on the currency markets. julie.fisher@icis.com