Thursday, 3 December 2009

Awash With Gas But Keeping Schtum

We've described before how the current surplus of gas is impacting on our old friend Gazprom and its continental customers. Prices under the oil-indexed contracts they use have been just shy of twice as high as spot prices throughout 2009, and the wholesale buyers have been taking far less than the 'take-or-pay' amounts.

Accordingly -
pacta sunt servanda
- they must pay anyway! At the same time, if they are to be true to their shareholders (not to mention their own customers) they should be vigorously pursuing their contractual rights to re-open the contract and get the price and volume reduced.

Being realistic, however, they will be told by their governments (particularly in Germany and Italy) to suck it up - and use their market power to pass on the costs. Because, don't you know, keeping Russia sweet is a strategic relationship - and let's face it, despite the EC's best efforts you do still have market power, don't you, guys?

In the meantime, they'll be posting modest losses. This is not, though, because of the take-or-pay clauses per se - despite how it gets reported - because a payment for gas you haven't taken now, but will take in future, is just an advance payment: a cash-flow / balance-sheet matter, not P&L.

The real P&L accounting issue lies elsewhere: carefully hidden. If they had to mark these large contracts to market ... with prices nearly 100% out-of-the-money ... the losses would be, well, very much more than they are showing. In fact, astronomical.

No wonder E.ON hopes that estimates of the gas surplus are pessemistic. Oh, and don't expect to see them marking-to-market any time soon: they cunningly delisted from the NYSE last year. US
standards of accounting and risk-management disclosure are just so-oo ... inconvenient.



Mark Wadsworth said...

Well yeah, those pesky German and Italian politicians.

Gerhard Schröder and Romano Prodi with their post-politics job-offers from Gazprom, to name but two.

Anonymous said...

Thanks as ever for the update, couple of questions:

1. So what is the timescale before the astronomical losses would become known if the prediction of supply turns out not to be pessimistic?
2. Would this actually trigger some 'balls on the table' negotiating with GazProm from the EU to actually get the contracts renegotiated if their beloved utility companies are all going to take massive hits?


Nick Drew said...

anon - timesacle before becoming known ? well you can easily make a very well-educated estimate right now. But they won't report it on a forward-looking MTM basis, just year-by-year as the losses become realised: German standards of transparency are, ahem ... compare and contrast with the info the used to provide in their 20-F, when they were still NYSE-listed - you can still find them here

(before E.ON bought Ruhrgas it was owned by Exxon, Shell, BP et al. Over several years, Rughrgas made super-profits (as you do with a natural gas monopoly!) Some of its, errr, *international shareholders* didn't want it known how much they were taking out in dividend. So it wasn't reported.)

in scale and nature it's an almost identical position to that faced by the old, pre-demerger British Gas in the mid '90s

although they whinged long and mightily about how they were up a gum-tree, too big to fail (etc etc you know the score), the govt told them to sort it themselves

and of course BG was actually big enough to take the hit when they came to renegotiate / buy their way out of the contracts - without the help of re-opener clauses, since they were proper, UK Common Law contracts

(they did this with only a small amount of help from HMG, who gave a modest but helpful tax ruling to the big oil & gas producing companies who were on the other side of the renegotiating table with BG)

E.on et al shouldn't need to go down this painful route because they do have re-openers available to them in their contracts with Gazprom

Let's assume, however, that they don't have the political will to take Gazprom to court. They are in fact big enough to take the hit, too.

But what they'll actually do is ask their governments to sub them (e.g. by going easy on liberalisation a bit longer) as the quid pro quo for not raising a political dust-storm

these companies and their respective national governments frequently operate hand in glove ... when Gazprom was trying to sell some of its shares several years ago 'to establish a market' (i.e. to gratify some of it's 'individual' Russian shareholders) no commercial concern could justify investing in them at that time. Somehow, however, Ruhrgas found the wherewithal to take a stake ...