EU Gas Supply Undermined By Short Term Contracts - Shell Says

Phil Watts, the chairman of the Royal Dutch/Shell group, says that the European Union is endangering the supply of gas from Russia by undermining the long term sales contracts required for gas investment. Mr Watts said that Shell's planned joint venture with Gazprom to develop the Zapolyarnoye gas field had become “a bit of a test case on the future of long-term contracts” in Europe. Shell had hoped to finalise the deal with Gazprom last week, but agreement on the $1.5bn joint development of the west Siberian gas field was held up by several factors, not least the contractual issue. Gas producers from Russia and Algeria, and the big European gas companies such as Shell, have been complaining that the increased spot market trading in a liberalised EU gas market will spell the end of long term purchase contracts. Such contracts have traditionally underpinned financing for big gas projects. But Shell is the first company to point to a specific project hampered by the EU market changes. Mr Watts said that “Europe is too important a market, and Russia too important a supplier, for this [impasse] to go on for long. I'm sure sensible solutions will be found.” Russia holds a quarter of the world gas reserves and the European Commission has launched a dialogue with Moscow to try to guarantee Europe's access to those resources. However, at last week's UK-Russia Economic Forum in London, he appealed to the EU “to address the issue of long-term supply with the utmost urgency”. Though the European Commission has attacked long term contracts as anti-competitive because they lock up supply from new entrants, the EU executive has recently indicated that it would not try to ban them. One option Shell and Gazprom are believed to be weighing is persuading EU gas buyers to join together to purchase Zapolyarnoye gas together. This would enable the buyers to share the volume risk involved in a long term take or pay contract. Typically, these contracts put the price risk on the seller and volume risk on the buyer.

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