First Eni, and now German giant E.ON have negotiated contracts with Gazprom that weaken, though do not break the oil price-contractual gas price link. E.On has entered into a contract which ties the price for a fraction of its purchases to spot gas prices:
E.ON’s gas unit has agreed with Gazprom on taking a “low double-digit” percentage of its supply at tariffs linked to spot market prices, Handelsblatt said yesterday, citing E.ON Ruhrgas AG chief Bernhard Reutersberg. The outcome of discussions with Gazprom may have been “more favorable than expected for E.ON,” Oppenheim Research GmbH analysts said in a note yesterday.
Germany’s E.ON Ruhrgas (EONGn.DE) said on Friday it had completed talks on more flexible gas purchasing contracts with Gazprom, allowing one of Europe’s biggest Russian gas buyers to get a chunk of its contracted supplies at spot prices. [ID:nLDE61I149]
The shares of Gazprom traded 1.1 percent up at 1512 GMT, in line with the broader oil and gas index .MCXOG of Russia’s top bourse MICEX .
“The agreements reached do not put into question the fundamental principles — the system of long-term contracts, the “take-or-pay” principle and the pricing system based on a peg to a basket of oil products,” the Gazprom source added.
That’s all well and good, for now, but if there remains a large disconnect between oil prices and spot gas values, the “fundamental principles” are maladapted to current market conditions, and Gazprom will be under substantial pressure to compromise on these principles.
The European gas market remains fragmented, and the spot market is still early in its evolutionary process; national boundaries still matter, slowing the development of a robust market like that in the US. (Thanks to Michelle Hallack for a very informative update on European gas market developments.) Nonetheless, spot market liquidity is improving, and the development of LNG and the lack of need for LNG in the US (freeing up cargoes for the European market) will speed that development. Moreover, successful shale plays in Europe would also facilitate development of a broader gas market. All of these developments will undermine the need for long term take-or-pay contracts linked to oil. The E.ON and Eni deals therefore likely represent just the beginning of a revolution in gas contracting in Europe, a development that will not redound to the benefit of Gazprom.