Gas contracts may be linked to renewable energy, Gazprom says

www.bloomberg.com
5 Jun 2012

Gazprom (GAZP), the world's biggest natural-gas producer, said renewable energy may eventually replace oil for indexing gas prices in long-term contracts.

"It's time to define ways to improve the system", Alexander Medvedev, deputy chief executive officer of the Russian gas exporter, said in prepared remarks for a speech today at the World Gas Conference in Kuala Lumpur. "As a new thing, one could choose a renewable source as an alternative energy resource for indexing prices in the future".

For now, Gazprom links its prices to oil and refined products with a time lag, a method that dates back to the 1970s, when the fuels were more commonly used in power generation. As Brent crude rallied in the past three years and gas traded on exchanges became cheaper, Europe's biggest utilities suffered losses under long-term contracts with suppliers and called for a new system. Units of E.ON AG (EOAN) and RWE AG (RWE), Germany's biggest utilities, are in arbitration with Gazprom over prices.

Gazprom has defended oil-indexed pricing as a way to protect buyers against the influence of producers and unknown future risks. The company, which supplies one-quarter of European gas needs and is seeking to raise that share to 30%, has no plans to break the oil-link any time soon. "One should be quite cautious with proposals to reject the oil-price indexation", Medvedev said today. Long-term gas contracts ensure security of supply and protect the interests of both buyers and sellers, Medvedev said at the conference. They help share risks and secure long-term investments, he said.