European natural gas markets and globalization : is the hybrid-pricing model here to stay?

Abstract

The European markets for natural gas are characterized by a dual pricing structure which reflects the continents very significant import dependence: the price of imports fluctuates following different dynamics than the price determined by the domestic markets’ supply/demand balance. This thesis researches the reasons for this price duality and questions the sustainability and desirability of such a hybrid pricing structure in the future. The time frame varies between a short-term period (defined as roughly 3 years) to a long-term period (roughly 10 years). To answer the research question, the distribution of reserves, consumption and production as well as their historical development have to be analyzed to determine the emergence of possible new trends as well as the market power of the main exporters. Considering security of supply, geopolitical dimensions are also taken into account, namely the EU’s energy policy and import diversification strategy. Finally, the paper focuses on the emergence of domestic markets within the context defined previously, with a particular attention towards these markets’ role in comparison to the bulk of the volumes imported under long-term sales arrangements. The result of the above analyses is a framework for describing the evolution of the European markets within a globalizing context. Such framework allows discussing the potential development of EU natural gas hubs according to 7 variables as mutually exclusive and collectively exhaustive as possible given the vastness of the matter and the interconnection between the different elements at hand. It aims therefore at being used as a map to follow the evolution of the growth of gas hubs within the considerably uncertain environment they are evolving in. Such framework also highlights how the complete preponderance of one pricing mechanism (hub versus long-term contracts) is more likely to happen over the medium to long term rather than the short term.