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the gas business in europe operates largely on the basis of long term ldquo take or 598019

GDF SUEZ (2010)

5 RISK FACTORS [extract]


5.3.1 SHORT- AND LONG-TERM ENERGY PURCHASES [extract] Long-term take-or-pay gas procurement contracts with minimum volume commitments [extract]

The gas business in Europe operates largely on the basis of long-term “take-or-pay” contracts. According to these contracts, the seller agrees to serve the buyer on a long-term basis, in exchange for a commitment on the behalf of the buyer to pay for minimum quantities, whether or not they are delivered. These minimum amounts may vary only partially depending on weather contingencies. These commitments are subject to protective (force majeure) and flexibility conditions.

To guarantee availability of the quantities of gas required to supply its customers in future years, a major proportion of the Group’s contracts are “take-or-pay” contracts. Regular price revision mechanisms included in the long-term contracts guarantee competitive gas prices to the buyer on the final market. If the purchased gas loses its price competitiveness, GDF SUEZ would only be exposed to the “take-or-pay” risk on the quantities purchased prior to the next price revision.

Most long-term procurement contracts are indexed on oil products price indices. However, with the emergence of short-term gas markets, gas prices are increasingly changing independently of oil prices, which are creating a conflict between short-term and long-term gas prices. A situation where the gas price remains constantly below the price of oil indexed contracts could have a significant impact on the Group’s revenues, in particular if the Group fails to renegotiate its long-term gas procurement contracts satisfactorily against the backdrop of a prolonged mismatch between gas and oil prices.



Gas purchases [extract]

GDF SUEZ Gas Supplies brings to the Group one of the largest and most diversified contract portfolios in Europe and its flexibility is a real competitive edge in the natural gas market in Europe.

It consists largely of long term contracts with a term of some 20 years. As of December 31, 2010, the average residual term of these long-term contracts (weighted by volume) was 14.9 years. This portfolio is balanced through purchases in short-term markets through Gaselys. Through this, [GDF SUEZ] adjusts its supply to the group’s needs by optimizing its purchasing costs. Close cooperation between the GDF SUEZ Gas Supplies and Gaselys allows that the portfolio can be finely balanced from day to day.

According to market practice, the long-term purchase contracts include take-or-pay clauses, according to which the buyer agrees to pay for minimum gas volumes each year, whether or not delivery occurs (except in the event of supplier default or force majeure). Most contracts also stipulate flexibility clauses. These are compensation mechanisms that allow volumes already paid for but not taken to be carried over to a subsequent period (make-up) or limited volumes to be deducted from the take-or-pay obligation, when the volumes taken over the course of previous years exceeds the minimum volumes applicable to these years (carry forward).

The price of natural gas under these contracts is indexed to the market price of energy products with which gas is directly or indirectly substitutable (mainly oil products). In addition, these contracts provide for periodic (two to four year) revisions of price and indexing formulae to account for market changes. Finally, most contracts provide for the possibility of adjusting prices (jokers’ rights) in exceptional circumstances, over and above the periodic reviews.

In certain cases, it is possible to change other contractual provisions in response to exceptional events affecting their economic balance (hardship clause). The parties are then required to negotiate in good faith and can, in the event of disagreement, revert to arbitration.

Supply contracts stipulate one or more delivery points. The delivery points of gas delivered by pipeline are spread across the entire European transport system and, in the case of LNG, are mainly sited at vessel loading docks at suppliers’ liquefaction plants.

GDF SUEZ Gas Supplies constantly seeks to match its portfolio to the market situation. This is materialized by drawing up new contracts and by price reviews. In a context marked by the decoupling of oil prices, to which the long-term contracts are indexed, from those of the gas sold in the market place, GDF SUEZ Gas Supplies started negotiations with all its main suppliers in 2009.

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