Gas Pricing

Gazprom, oil-link vs spot gas prices, and storage
April 1, 2016 – 12:49 am

froley-oil-gas-pricesEurope’s competition commissioner Margrethe Vestager is taking on some tough battles. Last week she accused US technology giant Google of abusing its dominant position in the internet search market. This week she has laid charges against Russian gas producer Gazprom over its sales practices in eastern Europe.

The EC Commission carried out dawn raids on a number of gas companies in September 2011 and opened an investigation a year later, in September 2012. On Wednesday, April 22, it filed a formal statement of objections against Gazprom over its gas sales to eastern Europe.

One of the central objections is that Gazprom acted anti-competitively by linking the price of gas to that of oil.

In fact this was standard throughout the European gas industry since its birth in the 1960s and 1970s, with suppliers including Norway, the Netherlands, Algeria and Libya all linking their prices to the oil markets. When gas production began there was no gas price on which to base the long-term contracts needed to secure infrastructure investments, and oil seemed a sensible alternative as a competitor fuel.

But the situation started to change with the development of spot gas trading hubs in northwest Europe from the late 1990s onwards, starting at the UK’s NBP market and spreading over following decades to Continental European hubs including the Dutch TTF, and Germany’s GASPOOL and NCG.

For some years there were parallel pricing mechanisms in effect in Europe. The UK largely based contracts on the spot market, while Continental Europe largely remained indexed to oil, though with growing elements of spot indexation in northwest Europe. The actual prices were fairly close in line under both systems.

But the global financial crisis of 2008 opened up a major disconnect between oil-linked and spot gas prices. Spot gas prices remained weak in Europe after 2008. The gas market, due to fixed pipeline supplies, has a large regional element, and European demand was badly hit by economic recession. There was also a boost to supply due to the unexpected boom in US shale gas production, allowing more LNG to come to Europe.

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