StatoilHydro to stick to long-term gas contracts

Norway-based producer StatoilHydro will continue to use long-term contracts for supplying gas "for some time," although it would "shift how we use them," Bjorn Jacobsen, senior vice president for natural gas marketing at Statoil, said.
Speaking at a natural gas seminar in London, Jacobsen said the company would "increasingly use contracts as a basis for business development," re-arranging deliveries across geography and time and looking for "commercial scope outside of the contract framework."

StatoilHydro, like many gas producers selling in Europe, tends to sell gas under long-term contracts that have for many years been linked to the price of oil and oil products. These have been long-term contracts of up to 30 years, and were developed at a time when there were no liquid gas markets in Europe that could be used for a reference price.
Jacobsen said the turnover under such contracts for the Norwegian Continental Shelf was NOK 200 bn per year, including the state's equity portions. As much as 90 % of Statoil's gas was sold under such contracts, he added.

Rune Bjornson, executive vice president for natural gas at the company, said these contracts had been successful for the company.
"We have one of the most attractive prices in Europe and have placed gas in the highest-priced location, in the highest-priced period," he added. Bjornson said, however, that the liberalization of gas markets in Europe also had benefited the company. He noted that the wholesale price on the UK's National Balancing Point and the German border price had been historically very similar, but different enough to allow for arbitrage.

"A mixed bag of indices contributes to a robust revenue scheme" for Statoil, he said.
Liberalization also has allowed greater use of the company's capacity, he said. Prior to the NBP's existence, about 20 % of its capacity would go unused because of customers using flexibility in their contracts, but that capacity now can be used to serve the wholesale market, he said. Arbitrage across time periods had added NOK 1 bn in revenues in 2007 for Statoil, while hub arbitrage between locations had added a further NOK 370 mm, he said.

Asked whether it would not make sense to service all customers under oil-indexed contracts, which have been above the wholesale price for the past year and more, Bjornson said "optionality is an issue. Our price risks would be solely production-based," he added, since the only effect on where gas was sent would be production issues and sometimes hub prices were better than the contract price, he said.
Asked whether contracts would change now that more liberalized markets were available and that importing liquefied natural gas to Europe could affect the wholesale price," Bjornson said there were now "more options. We can use liberalized markets, and we can go direct to end-users, but we won't make those decisions before we have to," he said.

Statoil currently was working on "many" price reviews, he said, with several settled in the previous month.
Contracts often included a price review clause to "rejig" prices every three years, Jacobsen said.