Foundations of Natural Gas Price Formation

Foundations of Natural Gas Price Formation

Misunderstandings Jeopardizing the Future of the Industry

By Sergei Komlev
Edited by Daniel Satinsky

‘Foundations of Natural Gas Price Formation’ analyzes market pricing for natural gas as a unique and controversially priced commodity. Natural gas is a critical foundational fuel that will not be supplemented by renewables for many years. Sergei Komlev explains why and how correct market price signals are critical to avoiding potential market failure.

Paperback, 158 Pages


April 2022

£25.00, $40.00

  • About This Book
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About This Book

‘Foundations of Natural Gas Price Formation’ examines the fundamentals of natural gas price formation and the five principal features that make it unique in the world of commodities. It presents a model of hybrid gas pricing developed by Sergei Komlev from his detailed analysis of the interlinked impact of these features that is presented as a corrective to potential market failure.

Using mainstream economic theory, the book presents hybrid-pricing mechanisms not previously analyzed. Through a failure to understand the role of hybrid-pricing, boosters of spot pricing mechanisms through gas hubs are promoting an incorrect understanding of gas markets that will lead to market failure and to potential critical supply shortages in the near-term future. ‘Foundations of Natural Gas Price Formation’ defends the system of oil-indexed pricing as an accurate, market-based mechanism that has stood the test of time.


Starting from the long-term contracts that have been the basis of the natural gas industry since its foundation, but which are now out of favor in Europe, the author delves deeply into the complex interactions of factors in price formation that are often ignored in the rush to move away from long-term contracts and exposes the risks in moving too far in this direction. A must-read point of view of gas exporters to better understand the place gas can play in our energy transition. — Dr. Thierry Bros, Professor, Sciences Po, Paris, France.

The author does an excellent job explaining the validity and role of oil-linked prices in regional markets and their advantage in reducing price volatility and in supporting investment in a sustainable supply chain for natural gas. — Dr. Rouben Indjikiyan, Professor of Energy Economics, Webster University, Geneva

“Sergei Komlev has written the definitive book on the past, present, and future of the natural gas industry in Europe and Eurasia. For more than forty years a collection of market practices served the industry well: long-term contracts, oil indexation, and take-or-pay clauses. These practices balanced well the interests of both producers and consumers. Yet in recent years almost all these practices have been abandoned and unwound. Will we regret the emergence of a new set of arrangements that fail to balance interests in productive ways? What comes next? Komlev provides an essential guide to the implications of such profound transformations in the natural gas industry.” — Rawi E. Abdelal, Herbert F. Johnson Professor of International Management, Harvard Business School, USA

“The author provides a fresh look at the underlying basis for the long-term contracts and oil-indexation that have been the cornerstone of the natural gas universe. He pays special attention to factors in natural gas pricing that have been ignored or minimized, leading to an incomplete understanding of gas pricing that is missing highly important details.” — Ali Hached, Senior Adviser to the CEO of Sonatrach, Algerian National Oil Company. Former Executive Vice President of Sonatrach, in charge of Hydrocarbons Marketing (1994-2006) and Member of the Executive Committee and the Board (1987-2006)

“This book presents a unique set of views and concepts with original and unorthodox conclusions, sometimes provocative, that will broaden the reader’s understanding both of the ‘known unknowns’ and ‘unknown knowns’ in natural gas contracting and pricing. A must-read for serious young professionals in the international gas and energy industry.” — Andrei Konoplyanik, Professor and former Deputy Secretary General, Energy Charter Secretariat, Brussels, Belgium.

Author Information

Sergei Komlev, head of Contract Structuring and Price Formation Directorate at Gazprom Export, is a well-recognized name in the European natural gas industry and a frequent participant in international gas conferences.

Daniel Satinsky, attorney, author and independent scholar, has collaborated with Sergei Komlev for more than 25 years in presenting his ideas to English-speaking audiences.


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Table of Contents

Preface; 1. What Makes Natural Gas Unique and How It Affects Pricing; 2. Role of Gas-on-Substitute Competition in Natural Gas; 3. Hybrid Pricing Mechanisms and How They Affect Price Levels; 4. Natural Gas as Waste Product of Oil and Liquids Extraction; 5. Natural Gas as a Financial Asset; 6. Pricing for Natural Gas and Investment Cycle; 7. Market Structures Affecting Gas-on-Gas Competition; 8. Pricing and Competition with Renewable Energy; Conclusion; Index.


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