Saturday, 3 October 2009

Wintry Outlook for Gazprom - and Granny ?

Long-term wholesale gas contracts – where producers like Shell or Gazprom sell gas to the large suppliers – have two key features. The price is set by an indexation formula (traditionally linked to the price of oil; less so these days); and there is a minimum annual amount to be purchased.

For reasons of Civil Code law (which I could explain over a beer), in most European jurisdictions - i.e. not us or the Irish - these contracts contain ‘re-opener’ clauses, under which the price and/or the minimum purchase quantity are subject to formal review if one or other party can demonstrate they have become significantly disadvantaged by the existing terms. Then, if not successfully renegotiated in a smoke-filled room, the issue can go to an outside expert, and ultimately to a court for a ruling. (This latter step wouldn’t usually work under Common Law.)

So much for the amateur legal exposition.

The point is this: lots of Gazprom’s European wholesale customers are seeking to trigger the re-opener clauses right now, on the rather compelling grounds that they are unexpectedly suffering from (a) a significant reduction in industrial gas demand, and cannot purchase the minimum quantities; and (b) the spot price of gas, which has fallen steeply
for the same reason. Thus far, Gazprom has simply waved them away.

But their customers have contractual rights, and a very good prima facie case. They are publicly-listed companies and there’s big money involved. What’s going to happen next ?

A very good question indeed. Putin has been quite emollient of late to western energy firms (he badly needs cash and technology), but re-openers of this type are win-lose in nature.

Will anyone dare to take Gazprom to court (which would generally be in the customer’s home country, or sometimes a neutral venue like Stockholm) ? Will Gazprom come up with some tidbit to offer them instead – e.g. a share in some obscure gas discovery - in the spirit of win-win? German and Italian buyers have often been suckers for this in the past.

Or will Gazprom simply darken its brow and let European governments understand it will be hypothermia for grannies everywhere next winter if the buyers have the temerity to exercise their rights ?

This stuff is negotiated in the utmost secrecy but I shall do my best to keep y’all posted.

ND

3 comments:

Sackerson said...

Oo-er.

Demetrius said...

Good one. While all the nonsense is going on this is one of the critical issues that is lost in the fog. It may all sort itself out, but it has the capacity to go badly wrong. We are due a bad winter, especially in Europe.

Blue Eyes said...

Town gas, it's the future.