Russian gas in Europe: pipeline and hubs price convergence analysis

ABSTRACT

The analysis in this paper was performed before the disastrous and unsolicited invasion of Russia to Ukraine. The paper aims to identify if the biggest Russian gas exporter Gazprom used market power to decouple its gas prices from European gas hub benchmarks. The empirical analysis is based on pairwise price convergence between the Russian pipeline and European gas hubs. The main finding shows that Gazprom takes advantage of its market position. The proposed model does not support the company’s claims of pipeline price tightness to liquid European gas hubs, and rather proves fluctuating and unstable price convergence between pipelines and hubs from 2016 to March 2020, right before the COVID-19 pandemic. Notably, a robust and trendy-stable price convergence is observed between the Russian pipeline gas and Brent benchmark. Methodologically, the paper contributes with a modified convergence model compliant with gas market fundamentals and suggests a time-expanding concept missed in previous studies. Ongoing political and European gas market developments of 2022 (during the paper review) support the conclusions.

KEYWORDS:

• EU
• gas market
• price convergence
• Russian pipeline gas
• gas hubs
• Gazprom

Acknowledgements

The author thanks Dr. Stephen Craig Pirrong and Dr. Boris Kuznetsov for for their expertise and assistance throughout all aspects of this study and paper preparation. The author thanks the European Energy Exchange AG (EEX) for providing data for the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For more see Eurostat. URL: http://bit.ly/37qoQCy (accessed: 01/07/2022).

² Source: EIA. URL: https://www.iea.org/commentaries/a-long-term-view-of-natural-gas-security-in-the-european-union (accessed: 01/07/2022).

³ Law of One Price: “Players without market power cannot affect prices because the market doesn’t allow the same commodity has two different prices in the long term..”

⁴ Eurostat. URL: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Natural_gas_supply_statistics (accessed: 01/07/2022).

⁵ GIIGNL URL: https://giignl.org/ (accessed: 01/07/2022).

⁶ EC President’s Resolution. URL: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_09_12 (accessed: 01.04.2022).

⁷ European Commission and other releases. URL: https://ec.europa.eu/commission/presscorner/detail/en/MEMO_15_4829 (date accessed: 05.01.2022) https://www.politico.eu/article/poland-hits-gazprom-with-world-largest-competition-fine/ (accessed: 05.01.2022).

⁸ European Commission on gas prices revision. For more see for example URL: https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_5202 (accessed: 01.04.2022)..

⁹ The table compares only the countries where both the Russian pipeline and LNG come. Details is given in Appendix A.

¹⁰ UK is excluded from the total sum. Germany is given in the Table for volumes disproportional difference.

¹¹ GIIGNL reports URL: https://giignl.org/resources2/ (accessed: 01.07.2022).

¹² Gazprom Export marketing data. URL: (accessed: 10.09.2022).

¹³ SP Platts. URL: https://www.spglobal.com/platts/ru/market-insights/latest-news/natural-gas/052021-gazprom-could-extend-european-gas-storage-injections-beyond-october-burmistrova (accessed: 01.01.2022).

¹⁴ Nasdaq. URL: https://www.nasdaq.com/articles/gazprom-not-offering-gas-for-exports-in-2022-on-its-platform-since-monday-2021-08-28 (accessed: 01.01.2022).

¹⁵ EU EEX has provided gas hubs data to the author on a non-disclosure basis.

¹⁶ Eurostat. URL: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Natural_gas_supply_statistics (accessed: 01/07/2022).

¹⁷ Gazprom Export Marketing data. URL: (accessed: 01.07.2022)..

¹⁸ Approximate, asymptotic p-value based on MacKinnon (1994).

¹⁹ Approximate, asymptotic p-value based on MacKinnon (1994).

Additional information

Funding

The work was supported by the American Association of University Women [NA]