For more than six years, the production of unconventional gas has driven North American gas prices down to a fraction of those in the EU. Yet a spot market trade in oceangoing liquefied natural gas (LNG) is unlikely to balance those price differences in a global gas market, as oceangoing crude oil trade does for oil markets. Maritime LNG transport is far more costly and capital intensive than for crude oil, and the high gas prices evident in the EU do not reflect the actions of supply and demand in a competitive market (as in North America), but rather result from the barriers to competitive entry inherent in EU gas industry regulation.

In this working paper, NERA Senior Vice President Dr. Jeff D. Makholm and Consultant Dr. Laura T.W. Olive examine the underlying reasons why a spot market for oceangoing LNG is unlikely to develop. EU regulatory barriers to competitive entry effectively exclude both spot-market LNG and unconventional gas production. Without a significant reduction in cost and the uncertainty in reliably gaining competitive access to customers outside of North America, the authors conclude that the LNG trade will remain dominated by long-term contracts instead of the commodity spot markets that typify world oil markets.