European Energy Firms Fall Short in Gazprom Purchases

European energy companies, faced with weakening demand and plentiful lower-cost fuel supplies, have bought far less natural gas from Russia’s OAO Gazprom this year than they are obliged to under long-term contracts — setting the scene for a potentially damaging showdown with Moscow.

A person close to Gazprom’s export arm said purchases by the company’s largest European customers had fallen short of the minimum specified in their “take-or-pay” contracts by about 10 billion cubic meters, or about 7%.
The undelivered gas is valued at roughly $2.5 billion, and the person said Gazprom will insist its European customers pay for it. The issue was of “great concern” to Gazprom, he said.

The financial crisis and ensuing recession have depressed demand for natural gas in Europe. At the same time, supply has surged thanks to new shale gas fields in North America and a slew of new liquefied natural-gas projects.

The supply glut has pushed down the spot price of gas in active markets such as Britain’s National Balancing Point, or NBP, and Zeebrugge in Belgium. In August, the U.K. forward gas price for delivery this winter was around 40 pence (64 cents) a therm, down from more than 100 pence a therm in June 2008.

But European companies that buy gas from big producers such as Gazprom, Sonatrach of Algeria and StatoilHydro ASA of Norway haven’t benefited from the price drop. That is because long-term European gas-supply contracts are linked to the price of oil, which has stayed stubbornly high. Crude has recovered from its lows of $35 a barrel at the end of last year and is now trading around $80 a barrel.

Some industry experts are now calling for a radical rethinking of the way gas contracts are priced, saying they should be linked to spot market prices for gas rather than oil products.

Wall Street Jounral (through Google News)