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Dutch Take On Gazprom in Battle Over Europe’s Oil-Linked Gas

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Screen Shot 2016-05-13 at 10.52.28The legal action coincides with government curbs on output after earthquakes in the Netherlands…

By Kelly Gilblom: May 18, 2016

In its new role as a natural gas importer, the Netherlands wants to make sure it doesn’t overpay.

GasTerra BV, the nation’s biggest buyer and seller of gas, initiated arbitration against Gazprom PJSC’s export unit, the Russian company said Monday. It is seeking a price review for fuel purchased from Europe’s largest supplier under a long-term contract linked to oil, which has rallied this year as the price on gas hubs extended declines.

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The legal action coincides with government curbs on output after earthquakes in the Netherlands, home to the European Union’s largest gas field, which turned it into a net importer of the fuel. Utilities from Germany’s RWE AG to Turkey’s Botas Boru Hatlari Ile Petrol Tasima AS filed arbitration claims against Gazprom PJSC’s export unit after market prices fell below contract rates, with EON SE and Engie SA settling cases with Europe’s biggest gas supplier this year.

Changes in price and a weakening of Gazprom’s position as a supplier mean “more customers will be looking for concessions and more market-reflective agreements,” Nick Campbell, an energy risk manager at Inspired Energy Solutions in Kirkham, England, said by e-mail. “There appears to be more and more arbitration cases as greater transparency becomes available from exported auctions and other cases which have gone to court.”

Anton Buijs, a spokesman for GasTerra, confirmed the arbitration case, declining to give details due to legal restrictions. Gazprom Export’s press office declined to comment on the arbitration. 

GasTerra filed paperwork for the dispute on March 31, and Gazprom must respond by June 4, the Russian company said. The arbitration process could take several years.

Groningen Field

Groningen-based GasTerra has exclusive rights to sell gas produced from the Groningen field, Europe’s largest, and also sells fuel from smaller fields in the Netherlands. Royal Dutch Shell Plc and Exxon Mobil Corp. each own 25 percent of the company, with the rest held by the Dutch state.

Gazprom Export and GasTerra signed a 20-year contract for supplies from October 2001, according to Gazprom’s website. GasTerra bought and sold 70.3 billion cubic meters (2.5 trillion cubic feet) of gas in 2015, about 5 percent of which came from Russia, according to its 2015 annual report. The average gas price fell 13 percent to 20.8 eurocents per square meter in 2015, the company said, implying a total value of 14.6 billion euros ($16.6 billion).

Cost Cuts

GasTerra is seeking to cut costs 30 percent by 2018 to compensate for falling production and low prices, Chief Executive Officer Gertjan Lankhorst said in February. Month-ahead gas on the Dutch Transfer Title Transfer Facility hub have fallen 9 percent this year, extending a 31 percent drop last year, amid expanding supply and stagnating demand.

“The most important theme is the transition in the market from oil-indexed to gas-indexed prices,” said its annual report. “The ultimate goal is to bring the contracts up-to-date so that they do justice to the existing agreements but are also in keeping with current market reality.”

Gazprom, which supplies about 30 percent of Europe’s gas, has said its long-term contracts linked to the price of oil are necessary to ensure investment in infrastructure. The contracts normally lag the price of oil by six to nine months.

Market gas prices are diverging from oil. Brent crude gained 32 percent through Monday, after last year dropping 35 percent.

“There is a need for oil-indexed contracts as it allows larger buyers to diversify their portfolio and trade round the position,” said Campbell. “But formula and functions need to be tweaked to make them more market reflective.”

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