In many European countries, the price of natural gas is linked to the prices of oil products. This link has a historical background. After the discovery of substantial natural gas reserves in the Netherlands at the end of the 1960s, it was necessary to determine the economic value of the natural gas. It was decided that the natural gas price should be based on the price of the alternative fuel(s) used by businesses and households before the discovery of the reserves. The reference fuels were fuel oil for industry and domestic fuel oil for households. This price methodology was chosen at the time, because it best reflects the market value of natural gas as a fuel.
Other price-determining variants are emerging in the current market, but most sales contracts offered by European and non-European suppliers are still based on oil prices. That is also easy to understand. The oil-price-link encourages investments in gas fields and pipelines, often running to billions of euros. Many investors (such as large energy companies, banks and pension funds) are only prepared to accept an oil-price-related risk for their investments. This is also due to the fact that, in large areas of the world, oil is still the leading fuel and only a considerably smaller amount of gas can be traded in Europe independently of the oil price. Or, to put it in industry jargon: natural gas is less liquid. However, we are seeing increasing trends towards more gas trading in this area, including an active trading hub, the TTF, in the Netherlands since 2003.