Gazprom stands behind take or pay on gas contracts

Gazprom says European customers should pay in full for contracted volumes, even if demand is less than that. But market players believe the Russian gas export monopoly will need to change its long term contracts.

Europe depends on Gazprom to satisfy a quarter of its gas needs, but a year of economic downturn now means that consumption has slumped 10%. That means that under the ‘take or pay’ principle, where consumers pay a fine if they don’t take the contracted volumes, European firms currently owe Gazprom about $2.5 billion and rising.

Gazprom is demanding payment in full, with Sergey Chelpanov, Deputy Head of Gazprom Export, arguing that long-term contracts are the key to European energy security.

“There is no reason to think that the new realities we are facing now, will not be incorporated into the structure of these long contracts. But long term contracts, it’s a vital part of the business. If at a wholesale level, at the level of importing large volumes of natural gas into the European Union, there will be no changes in that perspective.”

But experts like Aleksander Nazarov from Metropol say the gas giant has slim chances of receiving the payment in full.

“They can insist on anything but, in reality, these fines or these penalties that Gazprom wants from any European customer, they are likely to be cancelled – at least partially.”

Dominique Fach, from Enel points out the rapidly changing nature of the global gas market will leave Gazprom no choice but to become more flexible in its pricing and volume policies.

“The gas market is not only going to be a pipe market. Its also an LNG market. Its also today in the US we have the emergence of shale gas which is very important, it is changing the market in 5 years. So I think the take or pay incident is a small part of the global negotiation which is going to take place on the gas market.”

In a surprise move, Gazprom said this week it plans to increase gas prices for Europe by 20 to 30 dollars in 2010, which is likely to further strain its relations with consumers in the West.