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24 May, 2010 08:16

European gas market seeing contract term shift

The gas market in Europe has changed. New sources of supply and a sickly economy have made Gazprom's key market a more challenging place to operate.

At the 5th International Gas Conference in Berlin, customers have been calling for the Russian gas giant to show more flexibility in its contracts. The European gas market is currently good for the buyers.

Slumping demand and new sources for the fuel are giving consumers more options. One of those is to purchase the gas on short term 6 to 9 month contracts based on seasonal spot prices. These are often 30% lower than the prices Gazprom offers in its long-term contracts, though fluctuating and unpredictable, says Sergey Pravosudov, General Director at the Institute of National Energy

“In the countries that work mainly on spot contracts – the liberalized markets like the US or Great Britain – the prices may fluctuate from $120 to 700 within one year. Germany, France, Austria work more on a classical long term scheme.”

Countries like Qatar and Norway that deliver gas on spot contracts saw gas sales increase last year, while Russia's fell. Although they still earned less money, says Domenico Dispenza, President of Eurogas.

“Lower price means less money available to the sending part, less money available means less investments and less capacity to investor and this will bring less gas to the market and in some way this will equilibrate the market but it will take a little bit of time and finding a solution would not be easy.”

Neither will it be quick – Gazprom has said it does not intend to shift to spot contracts in the near future – a reasonable position given that the gas giant has long term contracts signed with its clients for 30 years ahead to deliver 3 trillion cubic meters of gas.

“We think the existing system of long-term contracts has shown its usefulness. So we'll continue to work on that basis,” says Sergey Kupriyanov, Gazprom Spokesman.

At present Gazprom’s contracts with Europe are based on a take or pay system – a measure which provides some insurance for the supplier in the event of a demand slump. But when demand for gas fell sharply in the crisis, the penalty charge became too much for some European customers as they faced their own financial difficulties.

Gazprom has already lowered the average penalty from 90 to 75%, though it’s still a tough burden for many.

And it's that burden which causes concern. Europe is likely to remain Gazprom's key market for the foreseeable future, industry analysts believe Gazprom will have to bend to the will of the market or risk alienating the customers it depends on to buy its product.