We said the other day that Gazprom is slowly getting real on the impact of the big gas surplus, and its best mate E.ON (EONGn.DE) - whom we’ve had a dig at recently - may be edging in the right direction too. Yesterday they published this revealing presentation, which contains some gems:
- they are renegotiating 80% of their long-term gas contracts; ‘clear progress is being made based on constructive, long-term relationships’ (what else would they say ?) and they are targeting ‘limited additional flexibility’ in these negotiations.
We’d surmised they’d been hurting and now we know: their European gas business EBIT is 33% down (and that’s just on realised losses – they aren’t likely to reveal MTM numbers). Hence the urge to re-negotiate. The correct ‘targets’, meine Herren, are (a) a lower base price and (b) gas indexation to replace oil indexation – OK ? But you knew that anyway.
- they reckon oil indexation is still justified by reference to competing fuels, and balances risk fairly (so why are you being forced to re-negotiate ?). Further, they reckon the oil-gas link has only temporarily come unstuck, and offer this graph ('TTF' = Dutch spot market):
What’s wrong with that ? Firstly, they make the cardinal mistake of interpreting forward prices as forecasts of future spot prices – which they categorically ain’t (there is evidence to this effect in their slide 30, correctly understood). It's only in steep contango because of the surplus. At most their graph shows a forecast crossing a forward curve at around 2013 – so what ?
More significantly, they assume the gas market will still be the same after a period of sustained oversupply: this is to be doubted. Much more likely, a viable spot market will have become established in Germany - the embryonic one is starting to eat their lunch already, as they admit! - after which no-one will quickly sign up for oil indexation again. As they also acknowledge, ‘gas indexed contracts are increasing’.
- they predict a very optimistic V-shaped recovery to their gas sales which, if it comes to pass, would indeed solve 2009’s take-or-pay problem. But will it ? They are bound to suffer a hit on market share after a couple of years of their competitors buying spot gas at half the oil-indexed price.
Let’s be fair, in several places (sometimes in code) there are signs that realism is dawning – and they’ve naturally to put on a brave face. Bottom line: prospects for that German spot market are looking better all the time. (And E.ON are trading like good'uns - trading EBIT doubled - they get the message all right.) Excellent news for the UK as we become ever more import-dependent.