Spain's Naturgy prepared for arbitration amid gas supply renegotiations: CEO

Barcelona — Spain's largest gas group Naturgy is ready to go to arbitration as it attempts to renegotiate a number of its gas and LNG supply contracts in light of falling energy prices and demand.

The company will not hesitate to seek arbitration to revise or renegotiate existing supply contracts, CEO Francisco Reynes told analysts on a conference call Wednesday, adding that such discussions were necessary amid the volatile environment and are covered by the contracts with suppliers.

"We are currently making use of the ordinary and extraordinary price review clauses included in most of our gas procurement contracts in order to make them competitive as soon as possible," Reynes said.

"The best case is a negotiated outcome, but it could eventually evolve into an arbitration process," he said.

The company did not say which contracts were under discussion, but said it expects to see some results by the summer.

The company holds a supply portfolio of over 30 Bcm/year with a range of mostly Atlantic Basin suppliers, as well as a fleet of 11 LNG tankers and capacity in several European regasification plants.

While its more recent contracts with US LNG producer Cheniere are Henry Hub-based, others are linked to Brent and based on lagging prices, which have caused a mismatch between gas spot prices and the company's gas procurement.

Spot prices

In contract renewals with the company's downstream customers, gas spot prices are playing an increasingly large role for large customers and therefore impacting the company's competitiveness.

International LNG sales volume increased 26% year on year to 36.6 TWh driven by an increase in short term sales, following the current market environment, the company said, noting that at the end of the quarter it had forward sold 84% of its 2020 volume and 55% of its combined 2021 and 2022 volume.

However, the weak prices mean that EBITDA from the unit fell 52% to Eur52 million as the company's net income fell 42% to Eur199 million in Q1 as a result of contract renegotiations which cause a transitory increase in shorter term sales in a depressed price environment.

The company has been able to cancel some deliveries from Cheniere and had to pay the tolling associated, Reynes said.

It also broke off renegotiations related to one supply contract at the last minute, he said without specifying, although the company noted that the volume involved was equivalent to around 6% of its supply portfolio, which is around 2 Bcm/yr.

The volatility was also the motive behind the company backing out of an agreement with Egypt's EGAS and Italy's Eni regarding the Damietta LNG terminal.

Reynes said Naturgy is open to new negotiations.

"Because of COVID-19, one of the long stop dates was impossible to be achieved," Reynes said.