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Italy’s Eni Challenges European Oil-Linked Gas Prices

By James Burgess | Wed, 05 March 2014 22:30 | 0

In a deal that could eventually lead to lower gas prices for Europe, Italian oil and gas giant Eni has renegotiated the terms of a long-term gas supply agreement with Norway’s Statoil and suspended a lawsuit over high gas prices.

The new deal would see Eni pay market prices for gas, rather than inflated prices linked to oil—savings that would eventually make their way to European consumers.

In return, Eni has temporarily suspended its $10 billion arbitration case against Statoil over high gas prices.

“The arbitration proceedings initiated by Eni are therefore suspended for 30 days, allowing the parties to complete a detailed agreement in the context of a constructive effort to address a changing European gas market,” Eni said in a press release.

The pending deal with Statoil is the third such over gas prices Eni has struck in the past two years. The Statoil deal would follow an Eni deal with Russian Gazprom and Algerian Sonatrach to cut gas prices.

Eni Chief Executive Paolo Scaroni said the cost of gas it buys from Statoil under long-term contracts is among its most expensive—averaging 30% to 40% above even European market levels.

The gas boom in North America is putting further pressure on the system of linking gas prices to oil in parts of Europe. This boom has led to reduced demand in Europe and lower spot market prices, while companies like Eni have been stuck in long-term purchase contracts signed when oil was much cheaper.  

Eni’s contract with Statoil was signed in 1998, when international oil prices were around $13 per barrel, compared to today’s average of over $100 per barrel. With gas prices linked to oil, this has resulted in major losses for companies like Eni who are stuck in long-term purchase contracts and forced to pass on higher prices to European consumers.  

By James Burgess of Oilprice.com

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