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Gazprom and E.On agree oil-link contract change

German utility drops arbitration claim against Russian exporter

Gazprom agreed long-term gas contract changes with E.On on 3 July, settling a long-running dispute over oil-linked supply deals which, the German utility claimed, had caused it to incur losses.

The renegotiated contracts will be retroactively applied to gas sales made from the fourth quarter of 2010. The settlement is expected to boost E.On’s half-yearly earnings by €1 billion ($1.26bn). For its part, the German firm has withdrawn an arbitration claim against Gazprom.

“With the successful completion of the talks with Gazprom, E.On has now successfully renegotiated the pricing conditions of all of its currently oil-indexed volumes under its long-term gas supply contracts,” E.On said.

"This marks a major milestone in restoring the competitiveness of E.On’s long-term gas contracts.”

E.On’s trading business lost €631 million in earnings in 2011 according to the company’s annual report, a huge slump compared with positive earnings of €1.205bn the year before. E.On blamed the losses on the dislocation between the oil-indexed and hub-based gas prices, which means the utility has to buy at the higher oil-linked price, but sell to consumers at lower hub levels. 

Russia provides around a quarter of the roughly 570bn cubic metres (cm) of gas Europe consumes each year. E.On’s long-term supply contracts with Gazprom run until 2036, covering a total volume of 600bn cm. E.On also has a stake in the Nord Stream gas pipeline, which is expected to have 55bn cm a year transport capacity by the end of this year. Nord Stream pipes Russian gas directly to Germany.

“This agreement represents a compromise and takes into account the current trends and developments of the natural gas market,” Gazprom Export chief executive officer Alexander Medvedev said.

E.On had already renegotiated around two-thirds of its gas contracts with other suppliers and opted for arbitration in a bid to amend its Russian contracts. Compatriot RWE and Polish utility PGNiG have also lodged arbitration claims against Gazprom over the same types of contracts. 

"We are pleased about the completion of our negotiations and the good result for both sides,” E.On’s chief executive Johannes Teyssen said. “Gazprom and E.On have shown once more that, as long-term strategic partners, they are able to arrive jointly at viable solutions.”

Before the settlement, Gazprom had resisted attempts to change the oil-inked formula, preferring to offer customers either a short-term discount or a deferment of volumes.

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