Price Determinants: Investments, Costs, Markets and Taxes

This Chapter deals with the determinants of gas prices in Europe and other relevant regions. We must confess that price trends in this market are not easily explained. Theories have not been able to catch all the determinants and are weak; nor do we want to try and give final answers in this work. We merely wish to describe the complexity of the market and examine certain aspects of it more closely. We begin by listing all the most relevant factors. We then turn to look in greater detail at those which seem to play a more influential role in price dynamics: infrastructure investments, the costs of each phase of the gas chain, the role of the spot and risk markets and finally, taxation (with a focus on Europe).

At the end of the chapter, we cannot avoid providing the patient reader with our opinion, though we are virtually sure that whatever we say will pretty soon turn out to be wrong. To sum up our findings, the most probable scenario, at least for the next 10 years, is a continuation of rising natural gas prices. Growing demand from emerging countries, geopolitical tensions, rising oil prices and increasing Exploration and Production costs, are all likely to combine to keep world gas prices high. The development of LNG, together with expansion of the pipeline networks, help to globalise what was once a largely regional market, leading to the convergence of global natural gas prices. However, in our view the single most influential factor for the period under consideration is the link between gas and oil prices. The highly liquid US spot market and the growing differentiation in use of the two carriers will not be enough to break this linkage, which will probably remain strong into the future. The reason is that none of the leading players in the world gas market have any real interest in breaking it (and thereby bringing prices down): certainly not the producing countries, nor the major utilities who earn huge incomes from higher prices, nor, finally, governments of consumer countries which collect sizeable revenues from taxes on natural gas.