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.