EU gas utilities may press for more price cuts from Gazprom

The renegotiation of long-term gas supply contracts with Gazprom will reduce the losses some European utilities have reported on gas sales, but additional discounts may be needed in the future to restore the profitability of these operations in the increasingly deregulated European...

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 E-mail article  Print  Save Additional News in English Još vesti na Srpskom Επιπλέον ειδήσεις στα Ελληνικά  Text

EU gas utilities may press for more price cuts from Gazprom



Fitch - 12.11.2012

The renegotiation of long-term gas supply contracts with Gazprom will reduce the losses some European utilities have reported on gas sales, but additional discounts may be needed in the future to restore the profitability of these operations in the increasingly deregulated European market, Fitch Ratings says.

Polskie Gornictwo Naftowe i Gazownictwo (PGNiG) is the latest large European utility to complete its renegotiation of prices. Details on the level of discounts granted to PGNiG and its peers have not been disclosed, but press reports indicate the discounts are around 10% to 15%. This may not be enough to overcome the gap between European spot and the oil-linked gas prices stipulated in the long-term contracts with Gazprom. With the oversupply of gas in Europe and stagnant consumption, the negative spread is unlikely to vanish without further renegotiations or a significant drop in oil prices.

Similar renegotiations have already been completed by E.ON in Germany, Eni in Italy, Gaz de France, Slovakia's Slovensky Plynarensky Priemysel (SPP) and OMV in Austria. Econgas, a subsidiary of OMV, and SPP managed to secure more favourable gas prices from Gazprom in late 2011-early 2012. Nevertheless, earnings from their gas supply segments are still under pressure, due mainly to the spread between spot and contract prices.

The relief for PGNiG may also be temporary. The company indicated it plans to file a motion to the Polish gas market regulator to introduce a price decrease for its customers in 2013, which would partly offset the benefit of lower prices from Gazprom. Polish gas prices for industrial customers are currently regulated, but this may change if the new gas law (the draft of which was published by the Ministry of Economy in early October 2012) is enacted. The draft stipulates PGNiG would sell 70% of its gas in the local commodities exchange. This will open up the Polish gas market to competition, and may also result in the traded gas prices heading towards European spot rather than oil-linked gas prices.

Gazprom has long resisted a spot component in its long-term supply contracts. Renegotiation of the gas contracts with major European utilities may be seen as a step in this direction. The pressure on Gazprom to reduce gas prices will probably remain. Another round of negotiations may be lengthy and difficult, but appears to be inevitable.

Source: bne


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