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Russian gas to western Europe: a game-theoretic analysis
Abstract
Since the fall of the Soviet Union it has been necessary for Russia to form a coalition with at least one of the transit countries Belarus and Ukraine in order to be able to ship gas to western Europe. This paper models the gas transit game using a cooperative module to determine the bargaining power of the three countries. The bargaining power is dependent on the coalition that is achieved. In the non-cooperative module, the three countries involved decide whether or not to cooperate, with Russia using side payments to induce cooperation. On the basis of published demand and cost estimates, the predicted Nash equilibrium is the cooperative one resulting in the grand coalition. Predicted gas quantities correspond quite closely to actual 2004 and forecast 2010 and 2030 figures. The completion of the North Transgas pipeline will benefit Russia, to the detriment of the others, particularly Ukraine.
... Moreover, the cooperative and non-cooperative strategies for the transit gas are studied by Schirillo (2006) and Zweifel et al. (2009). Grais and Zheng (1996) considered gas transit game as a three-player conflict including suppliers, transistors and importers under non-cooperative Stackelberg game. ...
Oil and gas as the non-renewable resources are considered very valuable for the countries with petroleum economics. These resources are not only diffused equally around the world, but also they are common in some places which their neighbors often come into conflicts. Consequently, it is vital for those countries to manage their resource utilization. Lately, game theory was applied in conflict resolution of common resources, such as water, which is a proof of its efficacy and capability. This paper models the conflicts between Iran and its neighbors namely Qatar and Iraq between their oil and gas common resources using game theory approach. In other words, the future of these countries will be introduced and analyzed by some well-known 2 × 2 games to achieve a better perspective of their conflicts. Because of information inadequacy of the players, in addition to Nash Stability, various solution concepts are used based on the foresight, disimprovements, and knowledge of preferences. The results of mathematical models show how the countries could take a reasonable strategy to exploit their common resources.
Europe is increasingly dependent on Russian natural gas imports. As Ukraine is the main transit country for gas trade between the two sides, the military conflict between Russia and Ukraine, which started in 2014 and has not stopped yet, has led to Europe's gas trade with Russia receiving an impact. Due to the importance of natural gas and the fact that this war was the largest in Europe since World War II, the trade relations between the European and Russian natural gas markets before and after the Russo-Ukrainian war and the diversification of natural gas in Europe have been studied by many scholars. This paper uses a review to summarize and sort out the relevant literature based on game theory to study the gas market trade relations in Europe before and after the Russo-Ukrainian War. According to these scholars, the trade relations between Russia and Europe in the gas market will continue to cooperate despite the impact of the Russo-Ukrainian war. The interruption of gas exports to Ukraine and the construction of pipelines bypassing Ukraine are acceptable to Russia and Europe. Iran, Azerbaijan, Turkmenistan, and Iraq, along with the United States, should actively invest in expanding their gas export capacity to have the opportunity to serve as an alternative to Russian gas and make Europe less dependent on Russian gas imports. This paper provides an understanding of the implications of the Russian-Ukrainian conflict for the world in terms of gas trade. This paper provides a reference for related studies, and to understand the impact of the Russian-Ukrainian conflict on the world from the perspective of the gas trade.
Are pipeline investments economically viable without long-term contracts?
For a long time, natural gas has been considered an oil by-product in South America, due to its restricted access to markets and low profitability. During the last two decades, however, significant investments have been made in upstream (e.g. Bolivia and Brazil) and in transportation (e.g. Chile-Argentina and Brazil-Bolivia connections) changing this scenario and making available to customers a cleaner and cheaper fuel. As a result, demand has flourished, as consumers have migrated to natural gas. Nowadays, considering firm and spot clients, such as thermal energy generators, it has surpassed regional supply capabilities. This tight market condition creates an environment of disputes among players, mainly in pricing, as Bolivia has once again nationalized its oil and gas industry to increase its share of the gas chain payoff, and in supply, as Argentina has cut exports to Chile. This turbulence only makes integration more difficult, since industry investments are capital intensive and with very long maturing periods. These issues have to be addressed if the players intend to form a reliable supply chain for consumers, who have to choose between natural gas and its substitutes: mainly coal, fuel oil and diesel.
We analyze how investment into the pipeline system supplying Russian natural gas to Western Europe is distorted for strategic reasons. We use a two stage multilateral bargaining game among heterogenous players, some lacking the ability to make long–term commitments. At the first stage the players negotiate contracts over access rights and investment. At the second stage investment cost are sunk, capacities are given and the players bargain about the sharing of rents from previous investment. Our qualitative and quantitative analysis predicts excess capacities in equilibrium and explains overinvestment on some tracks and underinvestment on others as an attempt to create countervailing power.
When the Soviet Union collapsed, Russian gas exports through transit countries where left in an institutional vacuum. No accepted legal system for the negotiation and enforcement of contracts was put into place. This paper analyzes how the lack of international institutions distorted in-vestment into the pipeline system supplying Russian natural gas to Western Europe. We use a two stage multilateral bargaining game among heterogenous players, some lacking the ability to make long–term commitments. At the first stage the players negotiate access rights and invest in transport capacity. At the second stage investment cost are sunk, capacities are given and the players bargain about the sharing of rents from previous investment. Our qualitative and quantita-tive analysis predicts excess capacities in equilibrium and explains overinvestment on some tracks and underinvestment on others as an attempt to create countervailing power in the absence of alternative means to protect property rights.
Russian natural gas is delivered through pipelines, running through Ukraine, Poland and other transit countries. We derive the bargaining power of the different players endogenously from the architecture of the transmission system and its possible extensions by applying the Shapley–Value as a solution concept for multilateral negotiations. This allows us to quantify the strategic value of additional pipelines — even if these exist only as an option and will probably never be built due to high cost. Accounting for the possibility that quasi rents from new investment are prone to opportunistic recontracting, we can rationalize the recent extensions to the system, as a deliberate attempt to weaken Ukraine's bargaining position. We are also able to make predictions about the likely development of the industry in the near future. The analysis pioneers the use of the Shapley value in applied industrial economics by proving its descriptive power in the analysis of vertical supply chains.
This paper examines the options of transporting Russian gas to Western Europe, an issue that has thus far been dominated by a single transit country, Ukraine, which has recently witnessed substantial political turmoil. The completion of a new transit corridor through Belarus in 1999, the so-called Yamal-Europe pipeline, has modified the situation profoundly. The paper develops a model of different strategies of Russia and Ukraine, and derives the analytical solution for Russian gas exports to Western Europe, prices, and the expected profits for the players; we also calibrate numerical results and perform simulations. It turns out that Ukraine suffers a loss from the market entry of Belarus, RussiaÕs profits significantly increase, and Russia has an incentive to expand its gas transit capacity through Belarus further. The gas price for West European importers falls in the case of cooperative behavior of Russia and Ukraine, and/or new pipeline construction through Belarus. However, both developments would also imply a higher European import dependence on Russian gas.
The current and potential benefits of the East-West gas trade are enormous for all participants. Realizing those benefits requires significant upfront investments. But the new, more complex structure of the gas transit system that has emerged following changes in Eastern Europe and the former Soviet Union has created uncertainties that bear on the expected benefits from investment. The authors argue for the existence of stable contracts that would create an environment more conducive to investments and allow all participants to benefit from expansion of the gas trade. As a guide to formulating incentive-compatible, transparent, flexible contracts, they propose a framework based on a Stackelberg game, with three players (a supplier, a transiter, and an importer) under Russia's leadership. They use this framework to analyze the contract modifications that would ensue from changes affecting the gas trade. They concluded that: (a) increased competitiveness of the transiter and supplier through cost reductions would improve the payoffs to all players (the transiter's and supplier's profits and the Western importer's welfare). Strategic behavior on the part of the supplier and transiter would ultimately reduce the price to the importer, enlarging gas demand and reducing costs. If increased competitiveness is the outcome of more costly gas from sources other than Russia, both the supplier's and the transiter's payoffs would improve but the importer's welfare would deteriorate. The supplier and transiter would have leeway to strategically raise their price and transit fee, respectively, while gaining market share. But the importer would face rising costs for gas imports and would lose welfare; (b) an increase in the scope for the importer to substitute between alternative sources of gas improves welfare for all three players. The perception by the supplier and transiter of increased threat of competition leads to a preemptive move not to lose market share. The transiter and
The gas industry is a crucial element in Russia’s strategy for economic development and international integration. It has often been stated that “what is good for Gazprom is good for Russia”, and — even though it is debatable — this idea marks the thinking of the Russian elites still today. Russian gas also has an important external dimension: European gas import dependency upon Russia is expected to increase from its current level of 40% to over two-thirds by 2030. The EU-Russia Energy dialogue is an outcome of this belief, as is the increased interest of Japan and even the United States in the future of Russian gas exports.
Gas transit is a sensitive issue, particularly in a crisis-prone region such as the former Soviet Union. Strategic power games and geopolitical issues seem to dominate ‘pure’ economic theory when it comes to determining transit fees, capacities, investment projects, and the like. Privatisation and deregulation become highly sensitive issues as well. It may have come as a surprise, therefore, that amidst the political, economic and social upheaval of the post-Soviet transformation crisis, the transit of Russian gas to Central and Western Europe has continued smoothly, and even expanded. Indeed, recent contracts and economic forecasts seem to foresee an increasing role of Russian gas on the expanding Western European market.
This paper analyses progress and obstacles to gas sector reform in the most important CIS-countries (Russia, Turkmenistan, Ukraine, Uzbekistan), taking a political economy perspective. This reform process is embedded in a very specific post-Soviet institutional framework stemming from the legacy of socialism. Firstly, we review the evolution of the gas sector for the period 1992–1998. The paper then identifies the post-Soviet specifics of gas sector restructuring, to which any reform strategy and technical assistance have to be adapted. We derive concrete, process-oriented policy conclusions to accelerate the reform process in a market-oriented way. The paper concludes with an evaluation of the perspectives of gas sector restructuring in this geopolitically strategic area of the world.
The current and potential benefits of European East-West gas trade are enormous for all participants. The new and more complex structure of the natural gas transit system, as emerged with political and economic changes in Eastern Europe and the former Soviet Union, has created uncertainties about the interdependence and interactions among the participants. Using a Stackelberg game with three layers of players (suppliers, transiters and importers), this paper establishes a framework to analyze rational behaviors of the participants and reasonable ways to formulate transparent, flexible, and incentive-compatible contracts. This framework is also used to show how to modify the trade contract to accommodate changes in the gas trade environment. Improving predictability of the players' reactions to external changes can enhance the reliability of gas trade and allow its expansion to benefit all participants.
We use cooperative game theory to analyze the power structure in the pipeline network for Russian gas. If the assessment is narrowly focused on the abilities to obstruct flows in the existing system, the main transit countries, Belarus and Ukraine, appear to be strong. Once investment options are accounted for, Russia achieves clear dominance. Competition between transit countries is of little strategic relevance compared to Russia's direct access to its customers. Comparing our theoretical results with empirical evidence, we find that the Shapley value explains the power of major transit countries better than the core and the nucleolus.
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