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. Last Updated: 07/27/2016

Electricity Firms Mull 5-Year Deals for Gas

Electricity companies are considering five-year natural gas supply contracts from Gazprom, a number of the firms said Thursday, possibly signaling an end to the type of gas shortages that left some of the country's turbines standing idle this year.

Some power producers said the contracts would have to be amended as they favored the gas monopoly and placed untenable demands on the generators, however.

The contracts, which were sent last month to the country's generating companies, or gencos, would replace the year-long Gazprom supply deals now generally signed in the electricity sector.

Gazprom has previously refused to sign longer-term deals to supply subsidiaries of Unified Energy System, the state utility that controls most fossil-fuel generators in the country.

The country's state-regulated gas prices, which are roughly five times lower than in Western Europe, make the domestic market far less profitable for Gazprom than its export markets.

UES chief executive Anatoly Chubais, who has lobbied Gazprom and the government to ensure more reliable fuel supplies for the electricity sector, said this week that the talks were close to concluding.

"Aside from several established disagreements, which we are fully capable of resolving, [Gazprom] is in principle ready" to guarantee five-year supplies on a take-or-pay basis, Chubais said Tuesday at the groundbreaking of a 400-megawatt turbine at a power station near Moscow.

Under a take-or-pay gas deal, the consumer must pay for an agreed-upon amount of gas even if that gas is not used or cannot be delivered. This has been the standard structure for power sector gas supply contracts since Chubais met with Gazprom CEO Alexei Miller in March, said Dmitry Terekhov, electricity analyst at Antanta Capital.

Gazprom has also asked for 100 percent pre-payment for the gas it sells, Pavel Kotov, head of the fuel-transport department of wholesale generator OGK-4, said in an e-mailed statement Thursday.

"In the form it was given to us, the document would be very difficult to implement in practice," Kotov said.

Depending on various conditions, such as the weather and demand spikes, generators need to be able to vary the amount of gas they consume, and in this respect the contract's terms are too inflexible, Kotov said.

Spokespeople for gencos OGK-5 and TGK-1 also said they were considering the contracts.

Though the ultimate decision will be made by UES, OGK-4 said it is sending its recommendations to the utility, which is carrying out a reform program to sell off all its assets by next July in a bid to introduce competition to the power sector.

Gazprom spokesman Sergei Kupriyanov on Thursday declined to comment on the contracts.