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The head of Germany's Uniper said long-term gas supply contracts will remain a necessary component for sharing risk between buyers and sellers in the European market, but they must be flexible to reflect prevailing market conditions.

Klaus Schafer told delegates at the Flame conference in Amsterdam on Wednesday he had long advocated a "radical reform" of the long-term gas contract model, but it still had a place in the European gas market.

Article Continues below...

"I still believe we need long-term contracts -- you can shift risk and return if you put it into a framework," Schafer said.

Uniper -- a subsidiary of energy group E.ON -- said at the end of March it had renegotiated a long-term gas import contract with Russia's Gazprom that "derisked" the contract for the coming years.

E.ON launched arbitration proceedings against Gazprom over the contract and its pricing in 2014, and the agreement resolved the arbitration case.

"If you reach a settlement, then apparently both sides felt there was enough meat on the bone so that it was worth doing that," Schafer said.

"It shows it is possible to do these kinds of commercial deals and not wait for arbitration, that it can be done by the parties which I feel was a helpful and positive move."

Schafer said the issue of gas pricing in Europe was not as simple as hubs versus oil indexation.

"[Contracts] always need to be market reflective. And from a risk point of view, both sides have to actually be willing to take the risk and live with it," he said.

"And you have to earn a margin on those contracts or else why would you take them if that is not a realistic chance to have?"

GAS DEMAND IN EUROPE

Schafer also said there were only two realistic areas for driving gas demand growth in Europe -- power generation and transportation.

Power generation, he said, could be a "massive" gas demand driver, depending on the extent of political intervention and how prices develop.

At present, there has been little coal-to-gas switching in mainland Europe because of the cheap price of coal.

But gas would be the main beneficiary of any political move to move away from coal for power generation.

Schafer also said there needed to be change in the carbon emissions market in Europe to bring about large-scale shifts in the energy mix.

"Do I believe that we need to see some increase in CO2 pricing to change the energy system in Europe? Absolutely yes," he said.

"We need to look at a radical revamping of the system."

Schafer warned against the introduction of a carbon price floor without other reforms to the European emissions trading system.

CNG OPPORTUNITY 'LOST'

On transportation, Schafer said there was still potential, but the opportunities to develop a bigger industry for compressed natural gas in Europe had been missed.

"The industry had the opportunity, but we have lost that to a certain extent," Schafer said.

"I would not put my last euro on the topic of CNG," he said.

He said, though, that there were more opportunities on the LNG side.

--Stuart Elliott, stuart.elliott@spglobal.com

--Edited by Dan Lalor, daniel.lalor@spglobal.com