Midstreamers See Need for Long-Term Contracts

Wedged between gas producers, who seek predictable sales volumes, and end-users and utilities who vote with their feet whenever a cheaper deal comes along, Europe's midstream companies – who take the financial hit when demand and hub prices fall – still see the need for long-term contracts. The only question is how to share the risk between the upstream and the midstream in a competitive world: as the cost of entry into the gas market is now low, the midstream appears an endangered species.

Yet Uniper's CEO Klaus Schafer said they still had a role to play: "You cannot leave it to retail buyers; that segment, the midstream." It took responsibility for stabilising and developing new demand, such as in power and transport. "It sets the right agenda and framework to ensure growing demand." Uniper is the power, gas and oil production company expected to be spun off from Germany's E.ON in June.

For the last six years the question of long-term contract prices has been high on the agenda. There have always been price-reopener clauses in these contracts, but in a competitive environment that is not enough: some midstream companies such as Engie want to remove the original formula forever to simplify their trade positions; others are happy for a mix of hub prices and oil.

Gazprom Export's CEO Elena Burmistrova spoke at 'Flame', this week's European gas conference in Amsterdam, about the need for hybrid contracts, where everyone appears to benefit from contracts that respond to market changes, but in a way that protects both sides from volatility.

Schafer told Flame that long-term contracts will never be finally settled as they must reflect moving gas market prices. Both sides take risk in order to make a margin and the balance will shift over time. Uniper settled out of court with Gazprom in its latest renegotiation, which Schafer said was the best way to do it. "My view is that this indicates these contracts are capable of reform to deal with new conditions to the satisfaction of both parties. The industry is about long-term contracts," he said.

Schafer said the "difficult" role played by midstreamers included accepting responsibility for investing in gas-fired generation, a massive move in terms of stabilising and developing new demand, and setting the right agenda and framework to ensure growing demand.

Edison's vice-president for midstream gas, Pierre Vergerio, said he had fought to reduce the price of five long-term contracts in the last five years. He agreed it was better to find a settlement privately but that is not always possible; and the main conclusion that the courts agreed with was that "the buyer is not here to lose money; the balance that existed at the start of the contract should be preserved, so that buying is still profitable even if prices change."

As to how to tackle the oil-indexation problem, where high oil prices do not reflect low gas demand, the two approaches so far have been to move the contract to hub pricing where possible; or to lower the base price. The latter allows both sides to claim a victory, with the sellers' oil indexation principle preserved and the buyer recompensed for circumstances that may lie beyond its control. However the confidentiality clauses last as long as the contract and few hard facts leak out into the wider world – something that both sides are anxious to protect as the European Commission has been considering asking for the right to see these contracts.

Vergerio accepted that using hubs is not ideal everywhere, as Europe's gas markets are moving at different paces and the degree of liquidity needs consideration. The seller needs stable cash flow, though, he said, and midstream companies present opportunities for producers to develop new routes: "Can they do it alone without the support of insiders in the EU to help them? Midstreamers deserve some reward, such as a long-term contract that is satisfactory to the buyer," he said.

Edison, part of French power group EDF, and Greek gas firm Depa are involved in talks with Gazprom about South Stream, while Uniper and Gazprom have an interest in remaining on good terms, as they are involved in the Nord Stream 2 pipeline project. Schafer told Flame that Gazprom and Uniper had evaluated the project and they should have the best view of where to invest their money. "I find it amazing that the most vocal opposition is aimed at private finance," he said. "No one worries about projects pushed by the European Commission or which take taxpayers' money."

Speaking for Wingas, now a Gazprom subsidiary, the head of sales Ludwig Mohring said that life had become harder for midstreamers in many ways, and a "new equilibrium" was needed between producers and midstreamers. "We have to find it soon," he said.

William Powell