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European Challenges: Competitive Pressure, Gas-Market Liberalization, and the Crisis of Long-Term Contracting

In: Gazprom

Author

Listed:
  • Andrey Vavilov
  • Georgy Trofimov

Abstract

Starting at the beginning of 1960s, the European gas trade in Europe was traditionally grounded in bilateral long-term contracts that were essentially asset-specific and relied on the parties’ commitments on the terms of trade as a basis for long-term investment upstream and midstream. The factors and premises driving these contracts were the high upfront fixed costs of building the pipeline network, increasing returns to scale, and the low elasticity of the demand for gas. Under these contracts both sides commit to specific long-term relations and are strongly interdependent on each other’s actions (Ericson 2009). The contract provisions ensure that the buyer cannot easily substitute competing traditional sources of energy such as oil or coal and that the seller cannot typically switch to alternative outlets—since the gas field in question is not connected to other users. “Asset-specific” in this context means that the gas flows contracted for came from a specific gas field to specific power generation plants or other downstream assets.

Suggested Citation

  • Andrey Vavilov & Georgy Trofimov, 2015. "European Challenges: Competitive Pressure, Gas-Market Liberalization, and the Crisis of Long-Term Contracting," Palgrave Macmillan Books, in: Andrey Vavilov (ed.), Gazprom, chapter 5, pages 139-179, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-46110-0_6
    DOI: 10.1057/9781137461100_6
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    Cited by:

    1. Lee, Yusin, 2017. "Interdependence, issue importance, and the 2009 Russia-Ukraine gas conflict," Energy Policy, Elsevier, vol. 102(C), pages 199-209.

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