Czech gas importer claims victory over underfire Gazprom

By bne IntelliNews October 25, 2012

bne -

Czech gas importer RWE Transgas claimed on October 24 that it is the "winner" in a long-standing dispute over contracted prices with Gazprom, with sources saying an arbitration panel has decided it does not have to pay for unused gas. If accurate, the ruling will only encourage the cases piling up against the Russian state-controlled gas company.

"I can only confirm that RWE Transgas is the winner against Gazprom in the take-or-pay dispute over long-term prices," RWE Transgas spokesman Martin Chalupsky told Reuters.

He gave no other details, but several unnamed market sources say that the German-owned company has won an arbitration case in which Gazprom was seeking the recovery of $500m in advance payments for unselected gas in the framework of a take-or-pay contract, according to Interfax.

A spokesman for Gazprom had no comment. However, Vedomosti claims that the contract assumes supplies of 9bn cubic metres per year until 2035, with required purchases of at least 90%. RWE had reportedly consistently purchased lower volumes since 2007.

Analysts at VTB Capital claim that RWE Transgas' victory will likely have little impact. "The case does not relate to breaching Gazprom's standard take-or-pay contract, as the matter under consideration was a supplementary agreement making it possible to adjust the volumes of gas to be purchased. Therefore, we do not think that the case has any implications for Gazprom's contracts with other counterparties."

However, the reported ruling clearly represents another setback for Gazprom, which has been fighting demands from European customers to alter the pricing formula in its long-term contracts since the 2008 global crisis and US unconventional gas supplies dented global spot prices. While the Russian gas giant has been eyeing China's thirst for energy, as well as potential supplies to Japan, it has not been able to agree prices to the east, and currently has no significant infrastructure to deliver gas to any market other than Europe.

Putting out fires

Gazprom kicked off the year by granting discounts of up to 10% to a few select customers, which saw it return RUB78bn ($2.48bn) in compensation in the first quarter. It is set to repay a further €1bn euros by the end of the year. However, while compatriot E.ON was amongst the blessed, Germany's RWE - as well as subsidiaries such as the Czech unit - missed out. That pushed it, alongside others from around Europe, to take its complaint to the Stockholm Arbitration Panel.

Formerly on close terms, RWE and Gazprom have been drifting apart since the dispute began and the German company assumed a role in the Nabucco gas pipeline project, which plans to reduce European reliance on Russia. A plan to expand cooperation by jointly building power plants in Russia was scrapped in Decemeber 2011, with little clear reason other than growing mutual distaste.

Meanwhile, although the likes of Turkey appear to have come to an impasse in their long-winded bids to join the few favoured with a price cut recently, Brussels has been upping the ante. Following a series of raids on the European offices of both Gazprom and its customers last year, the European Commission in September launched an investigation into suspected anti-competitive behaviour by the Russian gas giant.

That move reinvigorated the claims from companies in Central Europe, where Russia enjoys more leverage thanks to its dominance of the markets. Gazprom continues fighting an arbitration case over pricing brought by Polish gas monopoly PGNiG, while Lithuanian Prime Minister Andrius Kubilius directly name-checked the RWE suit in early October as the Baltic state applied to the Stockholm arbitration panel seeking close to €1.5bn in damages for over-priced gas purchases.

The same analysts from VTB admit the ruling in RWE's favour "is slightly negative for sentiment as regards other current and potential trials, as well as for Gazprom's overall position on the European market."

However, while it's round one to the Czech importer, RWE said the big fight is still on. "The other still open arbitrage case, taking place in Vienna, is about making new arrangements on [contract] prices so that they reflect market levels," Chalupsky told Dow Jones. "We expect this arbitrage to be concluded in the first quarter."

Alexei Kokin at Uralsib thinks the building pressure could yet see Gazprom forced into greater concessions. "The fact that RWE Transgas has been allowed to break the lower end of take-or-pay conditions is a sign that RWE itself may be able not only switch to hub pricing, but reduce the volumes bought from Gazprom," he writes in a note.

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