Engie Breaks Oil Price Link in Gazprom Contract
France’s Engie said April 12 it has reached an agreement with Gazprom Export to adapt the price of long-term gas supply contracts.
Pierre Chareyre, Engie’s executive vice-president, said: “With this agreement, Engie has de-risked its long-term supply contracts for the next years by adjusting their pricing to market conditions.” It's understood this means that the price Engie pays for its Russian gas is now hub-indexed – although to which gas hubs remains unclear – and no longer majority-linked to oil prices as was previously the case.
Engie received 10.3bn m3 from Gazprom under its term contracts last year, according to Engie's recent annual report.
This was a fifth of the 51.5bn m3 supplied to Engie across Europe under its long-term contracts in 2015, according to the same data. Only Norway supplied more term gas to Engie (26%), followed by Algeria (15%) and the Netherlands (11%).
Gazprom's decision, after decades of defending oil-indexation, to change the pricing of its supplies to Engie also also signals how competition for European market share is heating up between it and Norway's Statoil.
In 2016 Engie’s supply contracts with Gazprom will represent about 22% of its long-term supplies in Europe, the French group said.
It added that the agreement with Gazprom “illustrates the quality of the commercial relationship which has always prevailed between both groups since the signing in 1975 of the first natural gas supply contract between Gaz de France and Sojuzneftegazexport, more than 40 years ago.”
Unlike other companies such as Germany’s E.On/Uniper, which recently referred Gazprom to international arbitration over pricing and won a substantial settlement, and Poland’s PGNIG which is hoping for a similar result in an arbitration ruling due in mid-2017, Engie held out against use of arbitration for many years but launched a referral against Gazprom in late 2015. This suit was halted in March, Gazprom Export said, when the two sides reached agreement.
“Engie and Gazprom have once again demonstrated the possibility to find a commercial solution for the price revision of their long-term supply contracts, proving the quality of the relationship between the two parties”, said Chareyre, adding that his company indeed is “in continuous discussion with all its suppliers and regularly uses this type of negotiations which are part of its contracts.”
Engie is one of five west European companies that have joined Gazprom in plans to build Nord Stream 2; it was already a partner in the original pipe.
Engie’s total gas portfolio, including spot purchases and equity production, in 2015 was 105.3bn m3, of which one quarter was used in France and Belgium. However a much higher proportion of Engie's Gazprom supplies are likely to have been consumed in those two countries.
Chareyre took over the management of Engie’s Global Gas and LNG division from its long standing head, Jean-Marie Dauger, in mid-2015.
Mark Smedley