Bloomberg News

Gazprom, Eni Agree to Change Gas Supply Terms to Italy

March 01, 2012

OAO Gazprom (GAZP), Russia’s natural-gas export monopoly, agreed to lower the price of fuel deliveries to Eni SpA (ENI), curbing the effect of rising oil prices.

“The agreement on the revision of the price of the gas supply contracts represents an important step in the 40-yearlong strategic partnership between Gazprom and Eni,” the Rome-based company said in a regulatory filing, after Gazprom’s Chief Executive Officer Alexey Miller and Eni CEO Paolo Scaroni met in Moscow today. Neither company gave price or volume details.

Eni has won concessions on the amount of gas it has to take, Oswald Clint, a Sanford C. Bernstein & Co. analyst in London, said in a research note. The price changes will be retroactive and apply from Jan. 1, 2011, Bernstein said.

European customers including Eni and EON AG have sought changes to their purchase contracts with Gazprom since an oversupply following the 2008 recession caused spot market prices in Europe to slump below long-term contracts that are typically linked to the price of crude. Italy is the European Union’s third-biggest gas consumer after the U.K. and Germany.

“Eni will attain greater flexibility in gas purchases and, although details are limited due to the commercially sensitive nature of the deal, Eni claims that its cost of supply for gas will be lowered in 2012,” Clint said.

Neutral for Gazprom

The effect on Gazprom should be neutral, he said, with about 90 of the company’s gas sales still linked to oil.

Gazprom ties its contracts to prices for crude and refined oil products with a time lag of as long as nine months. Brent crude has climbed 12 percent since Feb. 1. The company previously agreed with customers including Wingas GmbH, GDF Suez (GSZ) SA, EconGas GmbH, Slovensky Plynarensky Priemysel AS and Sinergie Italiane Srl to cut the price of Russian gas, the company said in a statement on Jan. 17.

Germany’s largest utilities EON and RWE AG (RWE) are embroiled in arbitration with Gazprom over prices and volumes after losing billions of euros buying fuel at above-market rates and selling gas-fired electricity at a loss.

Utilities stand to lose about 8.33 euros ($11.09) a megawatt-hour by burning gas to generate power in Germany next month, according to Bloomberg calculations of so-called spark spreads based on power, gas and carbon prices.

The weighted average German contract price for this coming winter heating season, including oil-linked Russian and Norwegian gas, is about $13.70 a million British thermal units, according to Bloomberg New Energy Finance. That’s 19 percent more than the price for winter gas in the U.K., Europe’s most liquid market, according to broker data compiled by Bloomberg.

10% Discount

Changes in Gazprom’s price formula led to an average discount of 10 percent for some of Gazprom’s biggest customers as the company declined to increase the spot price component in its contracts, the Financial Times reported Feb. 16, citing Deputy Chairman Alexander Medvedev.

Alterations to sales terms by Gazprom since 2010 have tended to reduce the “base price” in contracts rather than give greater weighting to spot prices, Argus Media Ltd. said in a presentation in London last month.

Eni will begin contract renegotiations with Norway’s Statoil ASA (STL) by the end of the year, Bernstein said.

To contact the reporter on this story: Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net or Ben Farey in London at 2369 or bfarey@bloomberg.net;

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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