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Highlights

Russia's Gazprom has reached an agreement with Poland's PGNiG to adjustthe price of Russian gas supplied to the European country, in a move thatallows the partners to terminate the procedure over the price issue at theArbitration Court in Stockholm, the two companies said Tuesday.

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The two companies have signed an amendment to the contract to adjustprice terms of Russian gas supplies via the Yamal-Europe gas pipeline,Gazprom said in a statement.

"The agreed price takes into account current market prices of gas andoil products," Gazprom said.

At the same time, it does not call into question the key principles ofnatural gas trading such as long-term contracts or the "take-or-pay"principle as well as linking the gas price to oil product prices, Gazpromsaid.

"The spot price component taking into consideration price environment onPoland's market would not be directly included into the contact," it said.

The new terms and conditions of the Yamal contract "reflect changes thathave occurred on the European gas market in recent years," PGNiG said in itsstatement. "As a result, the negotiated pricing formula will also reflectcurrent market prices of gas," it said.

The gas price adjustment agreement was signed by PGNiG chief executiveGrazyna Piotrowska-Oliwa and Gazprom deputy CEO Alexander Medvedev.

"The agreement demonstrates that Gazprom and PGNiG are capable offinding, through business negotiations, a win-win solution that satisfies theinterests of both parties," Piotrowska-Oliwa was quoted as saying in PGNiG'sstatement. "It is a clear sign that competitiveness of PGNiG's long-term gascontracts relative to European markets is being recovered."

In turn, Medvedev said that the two companies "worked out a mutuallyacceptable mechanism to adjust the Russian gas price that allows thecontracts to flexibly accommodate specific changes occurring on the Polishand European gas markets."

Like most European gas companies, Poland's state-controlled natural gascompany PGNiG buys supplies from Gazprom under a long-term contract withprices indexed to oil. While European gas prices have remained relativelyflat over the last two years, oil prices have soared causing huge losses onoil-linked contracts for gas importers.

In February PGNiG filed a suit against Gazprom at the Arbitration Courtin Stockholm in an effort to index more than half of its contracted volumesto spot prices.

In September, Poland's Treasury Minister Mikolaj Budzanowski said Polandwas paying too high a price for Russian gas at over $500/1,000 cubic meters,compared with an average price on the Western European market of around$360/1,000 cu m, which was "absolutely unacceptable."

PGNiG reported a wider-than-expected net loss of Zloty 314 million ($96.9million) in the second quarter, blaming the high cost of gas imports. Thiscompares with the Zloty 19.7 million net loss the company recorded a yearearlier. Gazprom exported a total of 10.25 Bcm of gas to Poland in 2011, up 3.2%from 9.93 Bcm in 2010.

Gazprom's existing contracts on supplies of Russian gas to Poland andgas transit via Poland are valid till 2022 and 2019 respectively, accordingto Gazprom.

Earlier this year, Gazprom renegotiated long-term supply contracts witha number of its European clients, including German's E.ON, France's GDF Suez,Germany's Wintershall, Slovakia's SPP, Italy's Sinergie Italian and Eni,Turkey's Botas and Austria's Econgas.

The gas giant paid European customers $2.4 billion in price adjustmentsin the first quarter and expects to refund a further $1.28 billion inretroactive natural gas price adjustments till the end of this year.

--Nadia Rodova, nadia_rodova@platts.com--Edited by Maurice Geller, maurice_geller@platts.com