Gas losing decades-old link to oil in landmark Azerbaijan contract

17:30 | 11.04.2014
Gas losing decades-old link to oil in landmark Azerbaijan contract

Gas losing decades-old link to oil in landmark Azerbaijan contract

A contract for France’s largest natural gas company to buy the commodity from Azerbaijan shows the decades-old structure of Europe’s energy market is starting to crumble.

For the first time, GDF Suez SA signed a 25-year contract to buy gas from BP Plc and partners in the former Soviet republic at prices tied to those in Western Europe’s domestic gas markets, a person with knowledge of the matter told Bloomberg, asking not to be named because the terms are confidential. 

The change matters because purchases previously were made at prices tied to crude oil, which costs about three times more, an expense then passed on to consumers.

Europe’s gas contracts have been tied to oil since the 1960s as a way of providing certainty to suppliers who would then invest billions to build fields and pipelines. More recently, as gas prices fell and oil rose, utilities including GDF and Electricite de France SA as well as Germany’s EON SE and RWE AG pressed Russian gas-export monopoly OAO Gazprom and Norway’s Statoil ASA to revise long-term agreements.

As the crisis in Ukraine pushes relations between Russia and the European Union to their lowest ebb since the end of the Cold War, regulators want more flexibility in gas prices as Europe looks to diversify supply, said Thierry Bros, a gas-market analyst at Societe Generale SA. Gazprom supplied about 30 percent of EU gas last year, but will likely be competing with exports from the U.S. as well as Azerbaijan in coming years.

“Producers want to stick with oil-indexed prices under a system that dates to 1962, while European regulators are saying consumers should pay gas prices,” Bros said.

BP, which is leading Azerbaijan’s Shah Deniz gas project and the Trans Anatolian gas pipeline that will bring the gas to Europe, said terms of gas contracts were confidential and declined to comment further.

The Shah Deniz partners have agreements to sell more than 10 billion cubic meters of gas year starting in 2019 to nine different buyers, including Italy’s Enel SpA and EON. The deals are equivalent to more than 2 percent of European demand.

GDF’s contract for 2.6 billion cubic meters a year will help to diversify European supply routes and sources, the company said in September when the deal was announced. Details of how much the gas would cost weren’t disclosed at the time.

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