Pricing of Iran's Natural Gas Exports to Europe: An Application of the Netback Pricing Method

Natural gas prices do not follow the normal free market criteria where prices are established by the intersection of independent demand and supply curves.  As a strategic good that is traded between major suppliers (normally sovereign countries) and market monopoly or oligopolies in the importing countries.  One method that has been agreed between sellers and buyers is the buy back mechanism used in many long term contracts.  This pricing method is designed to provide confidence for both consumer and producer that they are getting a fair price and to increase competitiveness with alternative fuels and reduce the costs of natural gas transmission from producing countries to target markets. In this study, we use the market value of gas in the target countries of the European export market, and deduct transit and transmission costs to arrive at the optimal price of potential Iranian gas exports to Europe at the Bazargan border with Turkey has been calculated as $ 300 per thousand cubic meters. The comparison of the calculated prices with the current export prices of Iranian gas to Turkey and Iraq reveals that the use of netback pricing method for the European export market is fully justified.  Iranian access to the European gas market, however, in addition to economic factors is influenced by the state of political relations between Iran and European countries.