Russia's largest independent gas producer, Novatek, Tuesday confirmed it has signed a long-term gas supply deal with German utility EnBW.
"I can formally confirm...that we have executed our first commercial contract to sell natural gas on European markets with the conclusion of a contract with EnBW in Germany," Mark Gyetvay, Novatek's deputy chairman, said during the company's second-quarter conference call.
Under the contract, Novatek is to supply approximately 2 billion cubic meters/year of gas to EnBW for 10 years, starting from the fourth quarter of 2012, he said.
In mid-July, when EnBW said the supplies were secured, Novatek declined to comment on its involvement.
EnBW at the time declined to name the counterparty, saying only that it was a foreign gas producer.
By signing the agreement, Novatek plans to "begin [the] initial process to create a consumer market for LNG and natural gas in Europe...[and] establish a market position when legislative changes are eventually made to exports of natural gas [from Russia]," Gyetvay said.
Under current Russian legislation, state-owned gas giant Gazprom has monopoly rights over natural gas exports.
However, Gazprom isn't a party in Novatek's contract with EnBW, Gyetvay said during the conference call.
"It does not include an agency agreement with Gazprom," he said, declining to give any further details of the contract.
The contract covers a volume of around 1.9 Bcm/year, which equals about 2.5% of Germany's annual gas demand, EnBW said in mid-July.
The value is around Eur600 million/year ($730 million/year), the German company said at the time.
"The long-term and large-volume supply agreement secures EnBW against uncertainties in gas supplies," EnBW CEO Hans-Peter Villis said at the time.
EnBW said that the pricing in the contract reflects the growing importance of spot gas market prices.
This suggests that it will be at least partly linked to spot gas market hubs such as the German GASPOOL or NetConnect Germany, or Dutch hub TTF.
In the past, long-term contracts for gas used to base the price on a basket of fuel oil and gasoil prices. Some contracts now are around 85% based on oil prices, with 15% based on the spot gas market.
Some companies have looked to link deals entirely to the spot market.
EnBW said it could also use gas storage capacity at Etzel in Germany to help manage its gas portfolio.
EnBW sells 57.4 billion kWh of gas per year (about 5.4 Bcm/year).
In 2011, Novatek's own gas production came to 47.5 Bcm.
Novatek's joint venture with Russian independent gas producer Itera reached another 5.4 Bcm, according to the company's 2011 financial report.
