Eni SpA (ADR) (NYSE:E) (BIT:ENI), the largest Italian oil and gas company, has recently renegotiated a gas supply agreement in order to cut its long-term gas purchase costs. This is part of Eni’s long-term effort to achieve a competitive portfolio by cutting its procurement costs and renegotiating volume terms.

ENI

Heads of Agreement contract with Statoil

A press release issued by Eni SpA (ADR) (NYSE:E) (BIT:ENI) yesterday announced that Eni has signed a Heads of Agreement contract with Statoil ASA (NYSE: STO) on revision of terms in the long-term supply agreement between the two companies. Both price and volume terms were renegotiated in this new contract.

“The deal, which could eventually lead to lower gas prices for European consumers, will mean ENI, one of Europe’s largest gas importers and distributors, will pay market prices rather than inflated prices linked to oil for gas,” says the New York Times.

“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,” said the press release.

Eni wants to achieve competitive portfolio by Jan 1st, 2016

The Statoil ASA(ADR) (NYSE:STO) agreement is part of a long-term strategy of Eni SpA (ADR) (NYSE:E) (BIT:ENI) to reduce the cost of procurement of natural gas. Eni has struck similar deals with Gazprom OAO (ADR) (OTCMKTS:OGZPY) (MCX:GAZP) and Sonatrach in the past two years. This has helped Eni cut gas prices.

Gas prices in Europe have historically been linked to international crude oil prices. This has meant extreme costs to the European consumers. The pricing of gas was difficult in the past for a number of reasons. Limited supply meant that few countries dominated supply. Furthermore, the logistics of the commodity are such that it is difficult to homogenize prices across the globe. Hence, the only logical way to price the natural gas was to link it to the price of its substitute – crude oil.

However, pressure from the US shale boom in addition to the advent of LNG technologies has broken down the invisible walls that existed between different regions. The economic depression in Europe has also pressured the demand for the commodity, requiring the price of gas to move independently to that of crude oil.

“Some Northern European countries like Britain have mostly market prices for gas, but Eni SpA (ADR) (NYSE:E) (BIT:ENI) and other large gas importers, especially those in Southern Europe, have been working under contracts often signed years ago, when oil prices were a fraction of what they are now.

“For example, the Statoil contract goes back to 1998, according to Mr. Scaroni, when international oil prices averaged about $13 a barrel. With oil prices having risen to over $100 a barrel, the companies are buying gas at much higher prices,” reports the New York Times. This means that the European companies are losing out on significant gross margins.

Eni SpA (ADR) (NYSE:E) (BIT:ENI) is in the process of executing a long-term strategy to achieve a competitive portfolio by the 1st of January, 2016. Contracts like these with major gas suppliers bring Eni one step closer to achieving its goals and that much closer to earning significant margins on the sale of natural gas.