Europe Balking at Paying Gazprom

by Roman Kupchinsky

Europe’s three largest purchasers of Russian gas – German E.ON, Italian ENI and Turkish Botas – have all challenged Gazprom over paying for deliveries of gas that they contracted for but did not take due to reduced demand in 2009.

These three, along with other European companies, all have long term “take or pay” contracts with Gazprom. According to Kommersant Daily
the total amount due to the Russian concern is approximately $2.8 billion.

The European’s point out that Russia made a deal with Ukraine that released the later from paying the full sum of contracted gas earlier this year and they insist on the same treatment. The companies also point out that Russia did not pay Turkmenistan any compensation whatsoever after it ceased taking delivery of Turkmen gas in April.

According to recent media reports, Turkey has already indicated that it will negotiate with Russia on reducing the terms and volumes of gas deliveries and will seek to abandon the “take or pay” clause which has been the standard for almost all long term contracts signed between Gazprom and its European customers.
During the first 6 months of 2009, EU customers have reduced their imports of Russian gas by 29 percent.

Furthermore, prices for gas traded on European exchanges are currently half of what Russian gas is sold for under existing contracts. This had led to wide scale dumping of Russian gas into the spot market forcing major European energy companies such as ENI and E.ON to lose industrial customers who are turning to the far cheaper gas spot market for their supplies.

Currently 1,000 cubic meters of gas on the spot market sells for $116 while the price for Russian gas, which is linked to the price of oil, under long term contract is $287.

According to Kommersant, Gazprom plans to sell 13 billion cubic meters (bcm) on the spot market in 2009.

Another point of contention is pricing policy. The Gazprom contracts call for the price of gas to be linked to the price of oil and are adjusted after a lag time of 8-9 months.

On Wednesday Gazprom Deputy CEO Alexander Medvedev is scheduled to address the Board of Directors of Gazprom on “The Principles and Structure of Gas Exports by Gazprom during Lowered Demand by foreign buyers.” According to informed sources, Medvedev will discuss the possibility of unlinking gas prices to oil prices and lowering the minimal amount that buyers could receive under take or pay contracts.

In the United States, spot and futures gas prices are set by the Henry Hub, a natural gas pipeline located in Erath, Louisiana that serves as the official delivery location for futures contracts on the NYMEX. Prices are denominated in $/mmbtu (millions of British thermal units) and are generally seen to be the primary price set for the North American natural gas market.