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Europe: German E.ON says gas renegotiations not just about a spot-index

https://www.chemnet.com   Mar 10,2011 Platts
Johannes Teyssen, CEO of Germany's E.ON, Wednesday said that contract renegotiations with producers including Russia's Gazprom over long-term gas contracts were not just about spot indexation.

They were also looking at positive ways to grow the share of gas in the European energy market, he said, speaking at the company's annual results webcast.

"The solution will not be as trivial as proposing a spot index," Teyssen said. He said changes were much more fundamental, adding, however, that "the absolute price level has to reflect the reality."

In February Gazprom said that E.ON wanted to pay for its long-term gas supplies from Russia based on 100% spot gas prices, instead of paying under traditional oil-linked formulae.

The spot gas price has been below the oil-indexed, long-term contract level since the financial crisis of late 2008. Companies like E.ON that are buying gas at oil-linked prices but then selling to customers who demand lower spot gas levels are losing money.

E.ON chief financial officer Marcus Schenck said Wednesday that E.ON's global gas sales unit expected a loss of around Eur1 billion ($1.4 billion) in 2011. Teyssen said that in 2010, although suffering, the gas unit had made a small profit of Eur100 million.

Teyssen said that talks were also about the positive aspect of growing the gas market. "Gas will win over market share to the detriment of other energy sources," he said. The company was looking for "smarter solutions that provide an incentive to market gas valuably."

He said producer and importer had "a joint interest to have an appropriate market level because then growth is possible."

E.ON has previously spoken about building the share of gas in energy sectors such as transport.

NOT JUST GAZPROM

Teyssen said that the issue wasn't just with Gazprom, which only provides 30% of E.ON's gas supplies. "We have discussions everywhere," he said.

The company couldn't announce any progress yet on talks with its suppliers. "As soon as we have made headway we'll inform the markets," he said.

Though questioned several times, he did not give further details on how long-term contracts could be priced in the future.

In saying that talks are not just about the spot index, he could be indicating that what is more important is the final cost of the gas, rather than how it is calculated. A lower price could be achieved by retaining an oil link, but with added discounts.

However, E.ON has been seen as moving strongly in favor of spot indexation, so his comments may just mean that the talks also involve efforts to grow gas consumption as well as changing the reference price.

Teyssen said that some gas suppliers were ready to accept changing conditions, but even with those parties it took time to work out how to actually set out new contracts in legal terms.

He was also confident that E.ON would win out if renegotiations ended up at a court of arbitration. He said that E.ON's "guarded optimism" on contracts had a legal foundation: clauses in the contracts that say the gas provided under the long-term deals has to be provided "at marketable conditions."

"We have won all our arbitration panels up to now," said Teyssen, "and therefore I think we can be very confident."

E.ON hopes that the gas business will return to normal by 2013, allowing E.ON's total EBITDA by 2013 to be back at the 2010-comparable level of Eur13 billion.

Teyssen added the company was committed to gas. E.ON Ruhrgas had been "one of our most profitable investments ever," he said. And gas still had an important role in the global energy market.

"You shouldn't mix up operational problems and strategic views," he said.

LIBYA NOT A GAS MARKET PROBLEM

Asked about the current turmoil in Libya, Teyssen said it was "a serious humanitarian and social problem" but he did not see it having a "severe effect" on the European gas market.

Greenstream gas supplies from Libya to Italy, previously running around 25 million cubic meters/day, have been shut, Italian pipeline data has shown.

Teyssen said that if there were problems in Algeria that would have more impact on the gas market, and he noted that E.ON has operations in Algeria, although there were no current indications of any hazards.

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