European market integration for gas? : volume flexibility and political risk

Abstract

Is the European gas market integrated? Are there substantial price differences between gas from different export countries? Time series of Norwegian, Dutch and Russian gas export prices to Germany in 1990-1998 are examined. Cointegration tests show that that the different beach prices for gas to Germany move proportionally over time, indicating an integrated gas market (the Law of One Price holds). We find differences in mean prices, with Russian gas being sold at prices systematically lower than Dutch and Norwegian gas. Surveying the features of the long term take-or-pay contracts for gas sales, we discuss possible explanations for the price discrepancy. Among the explanatory factors are differences in volume flexibility (swing) and perceived political risk.