Wintershall AG, the upstream oil and gas unit of German chemicals company BASF SE (BAS.XE), said Friday it is still negotiating with gas giant Gazprom OAO (GAZP.RS) over prices and volumes, but insists on more flexibility from the Russian gas exporter.

"We are in the end stage of negotiations with Gazprom," said Wintershall Chief Executive Officer Rainer Seele, speaking on the sidelines of the official launch of the construction of the Nord Stream pipeline, which will ship natural gas pipeline to from Russia to Germany under the Baltic Sea .

"My main priority in the discussion with Gazprom isn't the pricing, Seele said. "The problem is with volumes, because the market is oversupplied," he added.

European gas markets are currently heavily oversupplied as the economic downturn weighed on demand, in particular from industrial customers that scaled down production during the recession.

Additionally, increased amounts of unconventional gas--such as shale gas and liquefied natural gas--entered markets across the world, which further exacerbated the oversupply situation.

Seele said his company will need more flexibility from Gazprom regarding the pricing of long term contracts, which are linked to the price of oil.

"We have a very strong customer market, and the customer ultimately decides what kind of pricing he prefers," Seele said.

Asked whether the long term gas contract price link to the price of oil is outdated, Seele said: "I don't care whether it's indexed to oil or to something else. At the end of the day, it has to be a price level which is competitive for the customer."

Over the past few months Gazprom has renegotiated gas supply contracts with European customers who sought more flexibility from the Russian company in terms of pricing and volumes. One concession Gazprom has made was to partially drop the oil-price link of gas-delivery contracts and instead index some contracts to spot market prices.

The move signals a major shift for the Russian gas producer, as it tries to defend its share of the European market amid lower demand and an increase in production of unconventional gas.

State-controlled Gazprom supplies more than a quarter of Europe 's gas needs, but saw demand in Europe --its key export market--plummet last year amid an economic crisis. European importers of Russian gas have criticized the company for lack of flexibility in its long-term contracts.

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