Continental European Long-Term Gas Contracts: is a transition away from oil product-linked pricing inevitable and imminent?

A paper published in April 2007 questioned the continued rationale of the linkage of Continental European long term contract gas prices to oil product prices.1 It concluded that the logic of linking gas prices to those of (mainly) oil products had largely disappeared in the major European gas markets. In the following two years, energy and non-energy events have begun to exert substantial pressure on the oil linkage mechanism. The global economic and financial crisis, which began in late 2008, has significantly depressed European energy and gas demand. Substantial new LNG supply is coming on stream during 2009-10, some of which is seeking markets in Europe. This has caused a substantial short term supply surplus which is increasing the pressure for change in the price-setting mechanism of European long term gas contracts. This paper does not repeat the majority of the material in the 2007 study, but focuses instead on developments over the past two years and the outlook in September 2009.

By: Jonathan Stern

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