Fourthly, there is a special clause on regular price review in every LTC since price environment as well as market conditions are constantly changing over time. The price review may take plays with a particular long-term contract pricing formula as well as within the general formula itself. The regular price review within a long-term contract is required because of two reasons. Firstly, gas prices based on the replacement value are more volatile and dynamic in comparison with cost-plus prices and, thus, are needed regular corrections and adaptations. Secondly, gas pricing formula and the gas price itself should adapt to and reflect price fluctuations of gas substitutes so that gas price remains compatible with other energies in the market (Komoplyanik, 2010).

Usually the formula adaptation lies in the changing of existing gas substitutes' shares (as usual LFO and HFO) and/or introduction of new gas fuel substitutes in the existing formula that depicts a new energy market reality. According to A. Konoplyanik (2010), other elements that are incorporated in the gas pricing formula are coal, crude oil, electricity, inflation etc. Currently, there are more than 10 elements in European gas pricing formula. It should be mentioned that the complexity of gas pricing formula is linked to the competition level: the higher the competition in the market (e.g. the more diversified are gas suppliers/producers), the higher the gas pricing formula complexity level due to the bigger number of replacing alternatives (Konoplyanik, 2010). Furthermore, there is a reduction of all time intervals occurred as another adaptation formula stage. For instance, price reviews take place more frequently, the reference period duration and the time leg between the date of revision and the reference period is becoming shorter and shorter that results in more relevant pricing formula.

Thus, the LTC pricing formula will continue to adapt to a new energy market reality by a broader range of gas substitutes and by reduction of all time periods that are taken into account in the formula. This results in more complex pricing formula and at the same time in more up-to-date and relevant representation of gas value in the market. Finally, formula adaptation process is a basement for secure gas supply that is quite important for gas producers, customers and end-users (Konoplyanik, 2010).

Fifthly, there are special destination clauses in every long-term contract. A situation can occur when gas is delivered through the same point and then is destined to different export markets. This could lead to the existence of different prices for gas delivered by the same producer and, thus, to arbitrage opportunities, e.g. a possibility to export cheaper gas purchased by a customer at one price and then to resell this gas at a higher price in the other market. Destination clauses that in essence are gas resale restrictions are aimed at protecting gas producers' interests, e.g. to extract the maximum possible revenue by preventing a buyer to use possibly existed arbitrage opportunities.

Finally, there is net back pricing principle under Groningen-type long-term contracts. The net back pricing is the gas replacement value minus transportation costs incurred by a supplier to deliver gas from the net back point to a buyer (Raszewski, 2017). According to the Energy Charter Secretariat (2005), the point here is that different transportation costs to different destinations are incurred and this implies different net back values earned by a supplier even if gas replacement values are equal in all these destinations. Thus, net back pricing principle secures competitiveness of gas delivered to various export markets.

Thus, Groningen-type long-term contract prices are oil-indexed that is represented in pricing formula. This pricing model with its unique characteristics guarantees secure and stable international gas supply that is the base for such a model to have been dominant pricing paradigm.

However, the gas market is constantly developing. More and more short-term structures have appeared in addition to already existing long-term contracts. Furthermore, the duration of LTCs in European gas market has diminished substantially (Komoplyanik, 2010).The transition from gas supplies with a limited number of players to a system with highly liquid market places (e.g. gas hubs) with multiple players has occurred in the recent years (Asche et al., 2013). Moreover, new pricing mechanisms and new players appear. There is a current transition undergone by European gas pricing from traditional oil-indexed pricing mechanism of LTC that have been discussed earlier to an new pricing paradigm. This is hub-based prices that could be determined as prices reflecting changing supply and demand in the market instead of relying on oil price (Stern & Rogers, 2011).

The hub-based pricing model was borrowed from the USA, where Henry Hub - the physical highly liquid market of spot gas trading - is situated.http://energypost.eu/hub-based-pricing-reshaping-eu-gas-market-even-spain/ The establishing of the hub called the National Balancing Point (NBP) by the United Kingdom could be considered as something considerably different as in this case there the UK has created virtual, not physical gas spot market. The creation of NBP was a trigger for other European hubs creation in Belgium, the Netherlands, France, Germany etc. Among the main reasons for pricing paradigm shift from oil-indexed long-term contract prices to hub-based prices are European gas market liberalization, the opening of Interconnector in continental Europe, the deregulation process, and the increase in competition level (Ache et al., 2013; Stern & Rogers, 2013).

There is no consensus found between those who consider Groningen model and oil-indexed prices as a leading and dominant paradigm in the current gas market and those who believes hub-based prices should be seen as an independent mature pricing mechanism that should wholly substitute “outdated” oil-indexed pricing approach in the nearest future. For the completed debates “picture” both position are to be analyzed.

The first and the most discussed question is whether hub-based prices are independent from oil and oil product prices (e.g. there is no correlation between hub-based prices and oil prices) or they follow the oil price volatility dynamics. There are mixed results in the literature regarding the existence of long-term relationship between gas and oil prices (Bunn, Chevallier, Le Pen, Sevi, 2017).

Villar and Joutz (2006) revealed shared trends among U.S. Henry Hub gas prices and oil prices thus claiming the existence of stable relationship between oil and gas prices. Brown and Yucel (2008) have received similar results: the scientists found out that movements of crude oil prices play a decisive role in shaping gas prices in the U.S. Henry Hub. Asche et al. (2013) demonstrates that the oil price may be considered as a “leader” one since oil prices determine both all long-term contract and spot prices for natural gas. The author names the high level of European gas market integration as a reason for such influence of oil prices since natural gas and oil have a common price determination process. Earlier the author (2006) reckons the gas prices follow oil prices within the European energy market. According to Sergey Komlev (2016), Oil-indexed prices have a strong influence on spot gas prices. Thus, in this case oil-indexed gas prices play a role of “anchor” prices for hub-based prices, e.g. hub-based prices follow the contract gas prices dynamics. Furthermore, it is stated in the ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014 (2015) that although hub prices are in theory supposed to be decoupled from oil and be responsive only to market supply and demand changes, their trajectory in practice is primarily determined by the oil-indexed gas prices movement dynamics. These empirical evidences give proponents of long-term contracts and oil-indexation a ground to claim that hub-prices are derivatives in relation to contract prices, that oil-indexed gas prices are first movers, whereas hub-prices are second movers and follow oil-index ones (Komlev, 2016).

In contrast, Serletis and Rangel-Ruuiz (2004) revealed that Henry Hub in U.S. and WTI (West Texas Intermediate oil blend, that quoted at the New York Mercantile Exchange) had no common price cycles. Later Hulshof et al. (2015) found out that oil has an insignificant impact on hub-based gas prices in Europe. The authors claim that the concept of linking gas prices to oil prices despite being the leading pricing formation approach in XX century and at the beginning of XXI century has lost its importance nowadays and could be considered as outdated pricing mechanism. It is claimed that gas-to-gas competition has become the dominant pricing paradigm for gas. There are a number of reasons why oil and gas prices should have different price dynamics. Firstly, these two energies have different transportation costs. Secondly, there is a difference in the production, processing, and storage costs for these fuels. Finally, oil and gas prices should be analyzed in different geographical markets. Oil prices, whether it is WTI or Brent prices, usually correlate with each other. In contrast, natural gas prices especially at hubs are more exposed to supply and demand changes in a particular region. Despite the fact that there is a high level of integration within the European gas market (Asche et al., 2013) and regional gas markets are not independent from each other (Stern, Rogers, 2014), prices in several regional markets might have quite different dynamics and directions (Hulshof et al., 2015). Thus, oil prices should be considered in global context, whereas gas prices vary from one regional market to the other one. Furthermore, Hulshof et. al. (2015) highlights that such variables as weather conditions and storage capacity have much more impact to hub-based prices than oil prices do. Nick and Thoenes(2014) have received similar results and conclude that temperature, storage and supply shocks cause relatively short effect on gas prices whereas oil prices have small impact on spot prices. Stern and Rogers (2013) claim that hub-based pricing is an independent gas pricingmechanism that has almost replaced oil-indexation principle nowadays. The authors reckon that oil-indexed pricing approach pursues clearly commercial purposes as it is believed oil-indexed to bring higher return in comparison with hub-based prices.

The fuel substitution between oil and gas are the second issue discussed by a number of scientists. Stern and Rogers (2014) suppose that oil-indexation has become outdated pricing mechanism as there is now a limited level of substitution between oil and gas. In the past petroleum products were widely used in Europe for power generation by large-scale plants, and it was reasonable to use oil-indexation principle in gas price formation as there was a real substitution between these fuels. However, the global market system has changed and oil is currently out of power generation sector that puts a considerable limit in oil-to-gas substitution framework (Stern & Rogers, 2014).

Komlev (2016) agrees with the Stren and Rogers's opinion that in power generation sector there is almost no substitution between oil and gas in physical terms since oil has been successfully replaced by gas. However, the author makes an emphasis on the fact that there is no need to focus only on power generation sector since a minor part of gas consumption in Europe (only 20%) belongs to this sector. S. Komlev claims there are other industries where the substitution between oil and gas is still strong. For instance, in residential, commercial and transportation sector gas consumption is much higher. Furthermore, the author highlights, that the International Energy Agency (IEA) claims that gas and oil will remain competitive fuels in industry, commercial and residential sector in the nearest future. As a final argument in favor of high substitution level Sergey Komlev states that this intefuel competition has a good chance to become stronger in the years ahead due to the broader use of natural gas in transportation sector. Based on these arguments the following conclusion might be made: since there is a competition between oil and gas in a number of sectors, there is a logic to hold oil-indexed gas pricing approach (Komlev, 2016). The fact that oil could be considered as a relevant substitute for natural gas is highlighted by Hulshof et al. (2015).

It is highly important to shed light upon the issue of to what degree hub-based prices are stable and to what extent spot pricing could be a representative market segment. Andrey Konoplyanik (2010) states that spot market segment in Europe is unstable and still underdeveloped. If the shift from oil indexation to gas-to-gas competition appears, gas prices will be pegged to quite unstable market segment that will bring higher risks both for gas producers and customers. Thus, the European spot gas market is not ready to such a shift (Konoplyanik, 2010).

Based on the fact that hub-based prices are supposed to reflect changes in market supply and demand, they are considered by a number of scientists as more fair representation of actual gas value in comparison with oil-indexed contract prices for gas. However, Sergey Komlev (2016) claims that prices even on the most liquid European hubs do not still represent a total demand and supply of the market. They reflect only a residual market segment since the majority of the gas demand and supply is met by long-term contracts with oil-indexed pricing mechanism. Thus, S. Komlev (2016) supposes that hub prices do not represent the real market equilibrium as they are supposed to do in theory, but instead such prices reflect only a small portion of the whole market. Thus, hub-based prices cannot be considered as a more fair representation of real gas value as a commodity. Moreover, the author highlights that based on the fact that hub-based prices represent a small market segment such prices may overreact to even minor imbalances and fluctuations in the market. Thus, they are considered to be unstable and highly volatile.

Low liquidity in the majority of European hubs is considered as a valuable reason by several scientists to claim that hub-based pricing paradigm cannot take the dominant position and replace oil indexation. As it was mentioned earlier, liquidity is considered as an important metric for competition level in the market. Andrey Konoplyanik (2010) reckons that the low liquidity level on European hubs is a prove that gas-to-gas competition and spot prices cannot replace oil indexation as hub-based pricing segment In Europe is still underdeveloped. Sebastian Nick (2016) highlights six years later that the liquidity level on European hubs is constantly growing, but remains still quite low. S. Komlev (2016) also emphasizes that European hubs are lack in liquidity and, thus, cannot guarantee secure gas supply in comparison with long-term contracts. In contrast, Stern and Rogers (2013) claims that churn rates on European hubs and, thus, the liquidity are high enough. It is suggested that the market has matured and now hub prices reflect more clearly the real supply and demand dynamics in the gas market.

S. Komlev (2016), D. Hulshof et. al. (2015), S. Nick (2016) make an emphasis on the existence of arbitrage opportunities since there is a coexistence of oil-indexed pricing and hub-based pricing paradigms. According to S. Komlev (2016), there are two reasons for arbitrage opportunities and to exist. Firstly, oil prices set a ceiling for gas prices so that gas prices cannot be set higher than oil ones since in this case consumers will start to buy oil as a cheaper alternative to gas. Secondly, the market structure development has led to the appearance of a new market participant - commodity traders and financial institutions. Now there is a four-tied market structure, where gas producers, customers, end-users and financial institutions and traders communicate with each other. The appearance of the fourth market player has led, according to S. Komlev, to over-contracting and paper gas glut in the market. In the current market structure customers has received an opportunity to shift volume risk from long-term contacts to the traders and financial institutions by transforming acquired gas deliveries into forward contracts. In this case a consumerhas the right to buyback a particular quantity of gas that is needed now by end-users in accordance with actual demand for gas. However, an amount of gas sold as a forward contract and an amount of gas bought back to meet the actual demand may not coincide. Thus, this difference could lead to a gap between paper and physical gas amount. As a result of this over-contracting there is paper gas glut in the market. S. Komlev (2016) claims that this glut pushes market prices below contracted prices for gas, thus, creating arbitrage opportunities.

In the Table 2 below the research analysis of the articles reported previously.

Table 2 Research analysis of the scientific literature

As it might be seen, there is no consensus about what pricing paradigm is dominant nowadays in the gas market, whether hub-based prices follow oil and oil-index prices or they fluctuate independently in accordance to supply and demand changes. The results of analysis regarding this topic are quite heterogeneous, and further research is needed.

1.5 Main European hubs overview

As it has been mentioned earlier, the European gas market is undergoing a transformation. While oil indexation approach is still considered as the dominant pricing mechanism, it is supposed that hub-based pricing paradigm is becoming more and more important in the European gas market. In the light of this new pricing paradigm development and, moreover, a constant European hubs development, it is relevant for the research to overview the main European hubs' status quo.

Gas hubs are considered as a marketplace where buyers and sellers can transact in an effective and transparent way based on non-discrimination and price transparency (Report of Eclipse Energy Group: 2013). Today, there are 9 natural gas hubs operating in Europe: NBP (National Balance Point in the UK), ZEE (Zeebrugge in Belgium), TTF (Title Transfer Facility in the Netherlands), PSV (in Italy), PEG and TIGF (in France), NCG, GPL (NetConnect and Gaspool in Germany correspondingly), and CEGH (Central European Gas Hub in Austria). NBP and TTF are considered to be the most liquid, matured and developed European hubs nowadays (Heather, 2015).

According to the hub classification offered by the Institute of Energy for South-Fast Europe, gas hubs could be classified as physical or virtual ones (IENE, 2014). A hub could be a physical point, at which a number of gas pipelines cross together.

Figure 10 The historical process of European gas hubs formation

Source: IENE, 2014

In other words, a physical hub is a real transit location where pipeline cross and gas is traded. Such hubs could serve as a transit points for the gas transportation and storage (IENE, 2014). For instance, the gas hub Zeebrugge is a physical one. A hub could be also a virtual (balancing) point inside a whole gas pipeline system like NBP in the UK or TTF in the Netherlands are. A virtual hub is a trading platform for various financial transactions where a large number of market participants could make gas transactions (IENE, 2014). To say it in a different way, a trading platform could be considered as a trans-regional zone in comparison with a physical gas hub which location is highly linked to the specific region/point/zone where gas must be transported to. In case of virtual hubs gas could be injected into any point of national trans-regional grid. Thus, a virtual hub has an advantage over a physical one: all gas which has been paid for could be traded that gives a certain flexibility, while at a physical hub only an amount of gas that has passed at the precise point/location can be traded that implies high risks (IENE, 2014).

There is another gas hubs classification proposed by Patrick Heather from the Oxford Institute for Energy Studies (2015). According to the approach based on gas hubs' market development, hubs may be distinguished into trading, transit and transition ones. Trading gas hubs are mature hubs and allow market participants to manage their gas portfolio. According to the OIES report (2015) there are only two trading mature hubs in Europe- NBP and TTF. Transit hubs are physical transit point where gas is physically traded. The main role of transit hubs is the facilitation of gas transportation. CEGH and ZEE are considered to be transit hubs (IENE, 2014). Transition hubs are virtual hubs which are quite immature, but have set prices benchmark for gas in their national markets. GPL, NCG, PEG, and PSV may be put in this hub category (OIES, 2015).

On the Figure 11 European hubs with regard of their maturity and liquidity level are presented.

Figure 11 European gas hubs classifications by maturity and liquidity level

Source: The Oxford Institute for Energy Studies, 2017

With their rapid current development, European gas hubs might represent a second source of gas provision accompanied by long-term contracts in the region. The liquidity levels, one the most important figures for the gas hubs development stage analysis, are constantly growing. Gas hub establishment is of a crucial role for the EU since it facilitates the integrated gas market creation. However, it should be mentioned that European hubs are quite young and less developed in comparison with the US gas hubs (IENE, 2014).

1.5.1 NBP - National Balancing Point in the UK

NBP has grown substantially over the last 10 year and continues to do so nowadays because of the close correlation with global oil prices and its attractive virtual organization that was an innovation at that time. Its range of participants include gas producers, LNG suppliers, retailers, power generators, industrial users and trading houses. As it was mentioned in the Chapter on Liquidity figure, the number of market participants is of a high importance for market liquidity level analysis and, thus, for market development stage assessment (Heather, 2015). For instance, in 2014 there were circa 200 companies involved in gas trade at NBP. This number is gradually rising every year (Heather, 2015). Trading activity at NBP made up 62% of all European gas trading in 2012. Trading volumes, one of the most important figure for hub assessing and a component of a churn rate formula, has been constantly growing over the recent years. Churn rate, the most important sign of hub/market liquidity, is also constantly growing. The Figure 12 represents gross and net churn rates for NBP over 2011-2013.

Figure 12 NBP churn rates 2011-2013

Source: IEFE, 2014

However, nowadays NBP shows relative decline especially in comparison with constantly developing TTF. It could be proved by reducing number of daily transaction at NBP. This NBP decline could be explained partially by the declined demand, but the main reasons for such a situation is the effect of the increasing relevance acquired by the competitor TTF, which is becoming the new reference for natural gas transactions in Continental Europe (IENE, 2014).

1.5.2 TTF- Title Transfer Facility in the Netherlands

TTF has significantly expanded over the last few years and now is considered as the biggest and highly developed gas in Europe. Liquidity levels based on churn rate analysis and traded volumes figures are evident proves for such statements. As we can see from the Figure 13, churn rates has and traded volumes have been rising steadily over 2011-2014 and now still continue to grow (IEFE, 2014).

Figure 13 TTF traded volumes and churn rates 2011-2014

Source: IEFE, 2014

Number of market players has been also constantly growing over the last years (Figure 14). As a result of constantly growing liquidity levels at TTF, bid-ask spread and transaction costs have become lower over the last years. As it could be observed, beginning from 2013, all spreads have fallen under 1% (Baringa report, 2015).

Figure 14 TTF active players figures

As it has been already mentioned, there is a strong competition between NBP and TTF gas hubs. According to the traded volumes figures, TTF overtook NBP in 2013 that happened for the first time since the gas hubs establishment in Europe. In 2015 TTF solidified its dominant position in the European gas market since TTF traded volumes exceeded NBP traded volumes every consequent year that could be considered as a solid trend (not an accidental result) (Figure 15).

Figure 15 NBP and TTF traded volumes 2015-2016

Source: Platts, 2016

According to the S&P Global Platts, in 2015 TTF became the most liquid European hub overtaking the UK's National Balancing Point hub for the second time.https://www.platts.ru/latest-news/natural-gas/london/ttf-natural-gas-traded-volume-overtakes-nbp-for-26181334In July 2015, TTF trade of 1,385 TWh beats NBP's 1,353 TWh. Churn rate figures for both hubs represented in the Table 3 also prove the dominance of TTF in the European gas market (Heather, 2015).

Thus, TTF is considered now as the most liquid and highly developed European hub since the Dutch hub has overtaken NBP, the oldest European hub, in terms of traded volumes, liquidity levels and churn rates. These two gas hubs are the most relevant ones for the research since prices on these gas hubs have a potential to represent supply and demand fundamentals changes for natural gas. Other European gas hubs are not enough liquid since their traded volumes and churn rates are quite low especially in comparison with NBP and TTF figures.

1.6 Hypotheses statement

The developing of the European gas market in terms of increasing liquidity levels, hub-based trading proliferation and the liberalization process aimed at energy security defines the market conditions nowadays. The decreased gas production within the market is accompanied by slightly increasing demand and quite stable middle-volume gas consumption. Furthermore, there is a graduate shift towards renewable energy resources since they are considered as the cleanest energy that fits environmentally friendly policy of the EU.

In 2015 the liquidity levels at TTF and NBP were already quite high. However, approximately at the end of 2015 TTF overtook NBP in terms of gas volume traded and number of players that were active in gas trading. Thus, the liquidity levels have been extremely high and continue to do so now. This signals that hub-based prices at TTF and NBP as liquid hubs should in theory reflect market changes in terms of demand and supply fluctuations and act as independent pricing mechanism in the European gas market (Stern & Rogers, 2013).

However, despite the facts discussed above, there is still no united opinion on whether hub-based prices represent independent pricing mechanism that forces out “outdated” oil-indexed pricing approach used in long-term contracts for gas delivery and reflect genuine supply and demand changes in the market or these prices follow oil prices dynamics and play a role of “secondary” pricing signals in relation to LTC prices that are drivers for hub-based prices and create “a ceiling” that cannot be exceeded by hub-based prices due to arbitrage opportunities. Thus, no integral and unified opinion on the essence of hub-based prices exists nowadays. These two polar opinions on hub-based prices nature are constantly in conflict.

Thus, the aim of this research is to examine the existence of correlation between hub-based prices, Brent oil and LTC BAFA prices. To achieve this goal it is aimed to answer the following research questions: what correlation exists between hub-based prices, Brent oil and BAFA LTC prices? If the correlation exists, what is the trend in correlation changes between hub-based prices and Brent oil prices? If the correlation exists, what is the trend in correlation changes between hub-based prices and BAFA LTC prices?

On the basis of the research gap and research questions formulated above the hypotheses could be formulated:

H1: TTF gas spot prices are positively affected by Brent oil prices

Since it is aimed to find out whether spot prices represent a separate gas pricing mechanism or they follow oil prices dynamics, the hypothesis has been formulated. Furthermore, it is supposed that there should be positive correlation between oil prices and gas spot prices at TTF since spot prices are considered to be guided by oil prices and play a role of “followers” in this case: the higher oil prices, the higher spot prices at TTF since they follow oil prices dynamics.

H2: NBP gas spot prices are positively affected by Brent oil prices

There is the same rational behind this hypothesis as in the H1: there is a positive correlation between spot prices at NBP hub and oil prices. Thus, it is supposed that the higher oil prices are, the higher gas spot prices at NBP are.

H3: The correlation between TTF gas spot prices and Brent prices is weakening over the time period 2008-2018

According to the scientific literature, markets with high liquidity level are able to depict market equilibrium (e.g. supply and demand dynamics and fluctuations). As a consequence, prices in such markets also respond to supply and demand fluctuations and are considered to be independent prices. TTF gas hub has been constantly developing over the recent years in terms of liquidity levels. Thus, it is logically to assume that as the time passes and the liquidity level at this European hub rises, the correlation between gas spot prices and oil prices should weaken over time since hub prices at liquid TTF reflect supply and demand fluctuations more and more clearly, while oil prices influence is less and less obvious.

H4: The correlation between NBP gas spot prices and Brent prices is weakening over the time period 2008-2018

The logic for this hypothesis is the same as for previous one: the rising of NBP liquidity level over time should enables spot prices at NBP reflect supply and demand dynamics more clearly, while the influence of oil prices dynamics should weaken.

H5: TTF gas spot prices are positively affected by BAFA gas contract prices

According to the S. Komlev (2016), gas spot prices are considered to be derivative and secondary pricing mechanism appeared in Europe. Thus, gas spot prices follow long term contract gas prices that play a role of principal and superior gas pricing paradigm. Furthermore, as it was reported in the previous chapter, there is an oil indexation component in the pricing formula for long term contracts for gas. Thus, if spot prices are positively affected by oil prices, the same relationship should exist between spot prices at TTF and BAFA gas long term contract prices.

H6: NBP gas spot prices are positively affected by BAFA gas contract prices

The similar rational states behind this hypothesis. Since spot prices are considered to be the secondary ones in relation to long term contract gas prices and there is an oil indexation component in every long term contract for gas delivery, NBP gas spot prices are positively affected by BAFA gas long term contract prices

H7: The correlation between TTF gas spot prices and BAFA prices is increasing over the timeperiod 2008-2018

BAFA prices is a monthly average price of natural gas on the German border that is formed in accordance with a formula including long-term contracts linked to the oil prices and spot gas prices. Thus, there is “a spot” component in the pricing formula for BAFA that initially gives a hint about the existence of the correlation between spot prices and BAFA long-term contract prices for gas delivery. However, it was previously mentioned in the scientific literature that the percentage of this spot component in the pricing formula for BAFA prices is constantly increasing due to spot trading development in the European gas market (Konoplyanik, 2010). It is aimed BAFA prices reflect up-to-date market condition and development process. Since the spot component in the pricing formula for BAFA is increasing after each session of formula review, it is logically to suppose that the correlation between spot prices at TTF gas hub and BAFA long-term contract prices for gas delivery is increasing over time

H8: The correlation between NBP gas spot prices and BAFA prices is weakening over the timeperiod 2008-2018

There is the same rational behind this hypothesis as it was explained for the H7 except for gas hub. It is aimed to examine whether the correlation between spot prices at NBP gas hub and BAFA long-term contract prices for gas delivery is increasing.

The stated hypotheses will be tested in the Chapter 3.

1.7 Summary

High pace of the European gas market development in terms of gas high liquidity levels at gas hubs, hub-based trading enhancement, and liberalization process define current market conditions. Main exporters should adapt export strategies to be competitive in the market. Gazprom has taken several measures in this regard, but there is a need to further develop its export pricing strategy.

There is a conflict between oil-indexed pricing paradigm and new hub-based pricing mechanism that formed hybrid pricing systems in Europe (Komlev, 2016). Furthermore, there is no unified opinion on hub-based prices essence in the scientific literature. A number of scientists (Stern & Rogers, 2013; Hulshof et al., 2015) consider hub-based prices as independent pricing approach that is able to reflect demand and supply fluctuations since the liquidity levels at hubs are high. In contrast, others (Komlev, 2016; Nemov, 2013; Nick, 2016) claim that hub-based prices cannot be considered as independent pricing mechanism since they are affected by oil and long-term contract prices.

Thus, it is aimed to examine the existence of the correlation between hub-based prices, oil Brent and BAFA LTC prices. In this regard eight hypotheses have been formulated.

2. RESEARCH DESIGN