Western Europe Natural Gas Trade

International Natural Gas Trade Project, Center for Energy Policy Research, Energy Lab, MIT


During the past two years, a group of researchers at the MIT Center for Energy Policy Research has been conducting a study of the medium term prospects for international trade in natural gas in various regions of the world. This report, focusing on Western Europe, is the third and final region study for this research project, the first two having covered trade between the U.S. and Canada and LNG trade in the Eastern Pacific. All three studies have shared a common focus and utilized a similar methodology.
Specifically, each study has explored the cost side of natural gas production and exporting, separating the “real” or economic costs from taxation, which is treated as a transfer payment, and differentiating between different cost reserves in various regions and countries. The common question which was asked was how rapidly would costs rise at different levels of demand growth over a 20-30 year period. On the demand side, a range of plausible future levels was derived by looking at prospects for gas capturing a greater share within specific using sectors of the different countries, considering whether or not new gas utilization technologies would play an important role in expanding gas demand, and integrating the effects of high or low oil price scenarios on total energy demand and natural gas’ competitiveness. Long term contracts for the advance purchase of natural gas and LNG are an important component of producer-consumer relations and play a significant role in determining the patternĀ  of international trade in gas. For this reason, each study has included research on contracting issues, including some modelling of how contracts might be improved to bring about greater efficiency. Finally dynamic trade models were developed in each regional study to integrate the separate components dealing with supply costs and demand levels. The models were used to test for data consistency, to help calculate long run marginal costs, to determine the relative costs of alternative trading patterns, and to measure the economic costs of different policy distortions. At all stages, careful attention was paid to the role government policies – pricing, quantitative restrictions, bargaining – have played and what effects these have had on efficiency. This study of the prospects for natural gas trade in Western Europe has followed this pattern, and this report chapters dealing with each of the above elements.