E.ON seeks arbitration over Gazprom pricing

German gas distributor E.ON Ruhrgas is seeking a ruling from an arbitration tribunal over the price of gas from Gazprom.

In a statement to RT Business the German company confirmed it was looking for arbitration but noted that talks with Gazprom over the pricing in long term contracts remained ongoing.“We can confirm that we have instituted arbitration proceedings in connection with our supply relationship with Gazprom. The possibility of either party initiating arbitration is expressly envisaged in existing supply contracts with producers if no agreement is reached in price renegotiations within a certain period. We do not wish to comment on details of the arbitration. Irrespective of this, talks between the parties will continue with the aim of reaching agreement by way of negotiation.”The move by E.ON Ruhrgas comes after it has taken a heavy hit from falling prices in European spot markets and the prices it is paying to Gazprom under long term ‘take or pay’ delivery contracts.E.ON Ruhrgas has previously attempted to get Gazprom’s agreement to linking the gas contract prices to spot prices.German press reports have suggested that E.ON may shut its Ruhrgas subsidiary and other business units, with E.ON confirming it is reviewing its strategy, with restructuring measures anticipated when it releases its 1H 2011 results on August 10.Troika Dialog analysts Oleg Maximov, Alex Fak, and Valery Nesterov have noted that Gazprom has reached agreement on a similar issue with Italian company, Edison and reflects the increased gap between the spot and long term contract prices, which they say is likely could widen throughout 2H 2011, before spot prices begin to rise.“The news comes just 10 days after Gazprom settled a similar suit brought by Edison, a small Italian utility. We estimate that after hovering around parity with spot prices in March, Gazprom's contract prices have taken off, opening up a premium of around 30% to the spot market and seeking to catch up with the oil price, which grew every single month from August 2010 to May this year. The contract price to Germany, at $436/mcm in July according to ICIS Heren, was a full $100/mcm higher than the spot price. If this were to persist, then E.ON, which buys an estimated 20 bcm per year from Gazprom, would be liable for an additional $2 bln. Gazprom's oil-linked contract price formulas are believed to track the oil price with a lag of six to nine months. As such, we expect contract prices to rise by at least another 10% by year end, though spot prices are also likely to post a seasonal increase and may indeed reduce some of the current gap.”