Transformation of the European natural gas pricing model

Abstract

This article discusses the prospects for Russian natural gas in the European market given the increased competition and changes in the geopolitical situation. Russia's problems in the European gas market began in 2012. Competition increased due to number of factors, including stagnation in demand for gas, competition from other energy sources, subsidies for the renewable energy, increased surplus of the liquefied natural gas (LNG), and changes in the geopolitical situation. While the EU gas import dependence is 70%, share of Russian gas exported to the EU in 2015 was 42% (132 billion m3). Nevertheless, the debate is going about potential refusal of Russian gas in Europe continues. Most claims against Russian gas are linked to pricing and unequal treatment of different markets. Which pricing policies should Russia adopt to address growing competition? To answer this, the article considers pricing models in the European gas market. Particular attention is paid to the assessment of current dynamics of the LNG market: prospects for the United States in this area, and analysis of the market position for the LNG plants currently being built. The purpose of this study is to assess the extent of potential changes in the European gas market, and to identify the key factors that must be taken into account in the first instance by Russia and its gas companies to build their strategy in Europe. The analysis in export gas price trends suggests that Russia has a competitive advantage in the European market, even considering the departure from using long-term contracts for gas pricing and switching to prices linked to market prices at traded European hubs. Protection of its main market - the European one - will be crucial for Gazprom as midterm strategic goal.