Novatek, Russia's No.2 natural gas producer, has asked its shareholders to approve a 177.3 billion rouble ($6 billion) domestic gas supply deal with power trader Inter RAO.

If the deal is signed, Gazprom, one of Novatek's main shareholders, would see its gas purchases from Inter RAO reduced to nothing, said two sources at Inter RAO.

According to a ballot mailed to Novatek shareholders and seen by Reuters, the company's board has recommended its shareholders approve a deal to supply Russia's power trader Inter RAO and its regional generation company OGK-1 with around 65 billion cubic metres (bcm) of gas from 2010 to 2015.

Gazprom has current contracts to supply Inter RAO, which owns power stations across the former Soviet Union, and OGK-1 with natural gas from 2007 to 2012.

The Inter RAO sources told Reuters that the company and its OGK-1 unit would not terminate the contracts with Gazprom if they sign with Novatek, but would reduce their gas purchases to zero.

Novatek, where Gazprom owns 19.4 percent, will hold extraordinary shareholders' meeting on Nov. 24, while Inter RAO stakeholders will discuss the contracts on Dec. 7.

Gazprom, which has seen its domestic and European gas sales plummet due to the economic downturn, said the contracts, signed under take-or-pay provisions, which fix a minimum amount of gas companies must buy annually, should be honored.

However, Inter RAO, chaired by powerful Russia's Deputy Prime Minister Igor Sechin, says Novatek proposed more attractive contracts than Gazprom.

Conditions of payment for Novatek's gas supply are also more attractive, while fines for less (than contracted) or excessive gas off-takes are materially lowered, Inter RAO has said.

An OGK-1 spokesman said his company has been in talks with Gazprom and other companies on gas supplies since August and Novatek set forward more favourable proposals.

Analysts say the deal will give a huge boost to gas production at Novatek which last year extracted more than 30 bcm of natural gas.

The contract is for Novatek to supply Inter RAO with up to 7.9 bcm and OGK-1 with up to 56.99 bcm of gas for five years.

Gazprom supplies domestic market with more than a half of its gas output. Last year its sales in Russia fell 6.5 percent to 287 bcm from 2007.

The company has said it has been incurring losses from sales in Russia, where state-regulated gas prices are substantially lower than in Europe, but should reach parity with export prices in a few years by growing gradually each year.

TNK-BP, 50 percent-owned by BP, and Russian gas producer Itera also deliver gas to Inter RAO.

(Editing by Karen Foster)

Russia Energy