Modelling Gas Markets
International Energy Management
Lecture: 27/10/2016
HS12 15:00
Dr. Yuri Egorov
University of Vienna & Economica
Introduction
• Gas is an interesting example in which the market structure
cannot be derived from pure economic aspects.
• Due to huge required investments, substantial transport costs
and large heterogeneity in gas deposits and major
consumption areas geography is very important.
• Politics also plays an important role possibly constraining the
economically optimal development.
• Technology of gas delivery (y pipeline or LNG) also shapes
models related to economics of natural gas.
• This lecture presents a brief survey of recent presentations of
Yuri Egorov and Franz Wirl at the conferences.
2
Energy Relations between Russia and EU
(OPEC Energy Review 2008; Infraday 2007, Berlin;
http://www.infraday.tu-berlin.de/index.php?id=1262)
• Energy issues in general and in particular with respect to Russian gas
exports play today a crucial role in political discussions covering a
substantial amount of space in the press.
• This paper argues that the European strive for energy diversification at
present is economically inefficient given the nearby resources and existing
or committed transport network to Russia. Furthermore, this present
diversification strategy will put Europe into competition with other
consuming regions in the future, when the sources available for
diversification turn dry.
• Hence, the current policy pursued by the EU faces a serious trade off of
risking future supplies for present energy security (after all its
questionable whether some of these sources are secure).
• We use the methodology based on the dynamics of gas reserves and path
dependency in trade flows based on investment in pipeline infrastructure.
3
N
Country
Reserve
%
R/P Production
years
mtoe
YUS
Cons.
2005
Export
mtoe Export%
1 Russia
47,82
26,6
80
538,2
75,52
364,6
173,6
32,3
2 Iran
26,74
14,9
>100
78,3
42,23
79,6
-1,3
-1,7
3 Qatar
25,78
14,3
>100
39,2
40,72
14,3
24,9
63,5
4 Saudi Arabia
6,9
3,8
99
62,6
10,87
62,6
0
0,0
5 OAE
6,04
3,4
>100
41,9
9,54
36,4
5,5
13,1
6 USA
5,45
3
10,4
473
8,63
570,1
-97,1
-20,5
7 Nigeria
5,23
2,9
>100
19,6
8,26
n/a
n/a
n/a
8 Algeria
4,58
2,5
52,2
79
7,23
21,7
57,3
72,5
9 Venezuela
4,32
2,4
>100
26,1
6,82
26,1
0
0,0
10 Iraq
3,17
1,8
>100
n/a
5,01
n/a
n/a
n/a
3
1,7
>100
21,1
4,74
16
5,1
24,2
12 Indonesia
2,76
1,5
36,3
68,4
4,36
35,5
32,9
48,1
13 Australia
2,52
1,4
67,9
33,4
3,98
23,1
10,3
30,8
14 Malaysia
2,48
1,4
41,4
54
3,92
31,4
22,6
41,9
15 Norway
2,41
1,3
28,3
76,5
3,80
4
72,5
94,8
16 China
2,35
1,3
47
45
3,71
42,3
2,7
6,0
11 Kazakhstan
Table 1. The main world gas reserves holders, their production and consumption.
Source: BP data [1] and calculations by authors.
4
Fig.2. Dynamics of gas reserves for smaller reserve holders (excl.Russia
and Middle East). Source: BP data, IEA scenario. Calculation by authors.
6
5
R2005
R2010
R2015
R2020
R2025
R2030
3
2
1
a
Ch
in
No
rw
ay
si
a
ay
M
al
ra
lia
Au
st
ia
on
ez
kh
st
za
Ka
In
d
an
q
Ira
la
ria
ne
zu
e
Ve
-1
Al
ge
ria
0
Ni
ge
Reserves, trln.cum
4
5
Asian gas demand (as in 2009)
• At present, main Asian gas consumers (LNG) are Japan and S. Korea. The
role of China is growing: in 2005 it consumed 47 bln.cub.m of gas, contrary
to only 23.8 in 2000. The demand for gas imports from South-East Asia is
likely to grow faster than from EU. Who will supply this increases amount
to Asia in the future? There is a technical possibility of Russian gas supply
(pipeline) from Eastern Siberia and Sakhalin (LNG) to Japan, Korea and
China.
• Summarizing, by the middle of the 21st century most of the gas reserves
on American and African continents will be depleted. Russia and Middle
East would become the main gas suppliers. There will be oligopolyoligopsony relationship, with 3 main producers (Russia, Iran, Qatar) and 3
large consumers (USA, EU, Pacific Asia). As a consequence, Europe will
have to compete in the future in meeting its natural gas demand with Asia
and the USA.
• Currently we have new forecasts by IEA about substantial growth in future
gas demand from China.
6
EU Supply Security. Future Scenarios
• By 2030, global gas trade will grow from current 22% of production to 40%
[Weisser, Energy policy 35, 2007].
• EU directive 2004/67/BC about multinational solutions in gas supply to
embrace security is a correct step in meduim term.
• But the long run moderate European reserves (Netherland 0.8% w.res.;
Norway 1.3% w.res.) will dry, while supply from Northern Africa is also
limited (the largest is Algeria with 2.5%) and will dry sooner if EU will
diversify more. Nigria and Venezuela are located at larger distance, and EU
will compete with the USA, Asia and other regions for future gas exports
from them.
• In the long run, the main gas reserve holders (Russia, Iran, Qatar) will
dominate in gas export market, and if EU wants to have less gas
dependence on Russia, it should either invest in pipelines from Iran or LNG
from Qatar.
7
Russian gas and geography
• Due to Russia’s geographical structure, it relies much more on land than
on sea delivery of its goods.
• The major gas production area in Russia is concentrated in the North-West
Siberia. Among perspective gas regions in Russia, there is Arctic shelf and
Eastern Siberia (Lena-Baikal region).
• Gas pipeline to Western Europe is a costly investment: it should pass 3-4
thousands km of Russian territory before reaching importers. That is why
investors (as well as producers) prefer security in supply.
• Shelf locations can be linked either with old EU customers, or with newly
build LNG infrastructure. The gas from Far East (Sakhalin) can be easier
linked to Asian consumers.
• All these considerations show the substantial increase of Russian
bargaining power in future gas supplies, and EU should take them into
account.
8
Eurasian gas market
9
Options for the development of Russian Gas
Source: Mitrova presentation at IAEE2010
10
Possibilities of Russian gas export
diversification (as viewed in 2010)
Source: Mitrova 2010
400
350
85
300
36
50
90
87
188
189
55
70
92
78
194
196
24
250
9
95
200
74
7
66
92
88
53
60
150
100
134
159
163
140
156
201
158
50
0
2000
2005
2008
2009
2010
Europe and Atlantic
2015
CIS
2020
2030
Asia
11
Russian scenarios
• Russia has several options in its long term gas strategy. The scenarios 1 and 2
occur for high time discount, 3 and 4 - for low.
• The 1st scenario is in fast development of gas production and pipeline
capacity. It might be the best for EU in the long run.
• The 2nd scenario assumes also the development of LNG. Russia can choose
this scenario if threatened by lack of access, long term contracts by EU and
transit games by some European countries. Under this scenario, Russia
makes less commitments and strategically decides to have a fraction of gas
that can be sold to any buyer in the world. The main consumers of Russian
LNG are then likely to be USA and Japan, while Europe is likely to have less
Russian gas in its future portfolio.
• 3rd scenario takes place for low time discount (that requires fall of inflation
and interest rate in Russia). There is slow expansion of production, and
growth of export comes from re-export of Central Asian gas or decline in
domestic consumption of gas.
• Scenario 4: Keeping present steady state in gas production and export to
preserve gas reserves until they become more scarce.
12
13
14
Future Gas Game (from presentation on
Globalization conference, Warsaw, 2008;
http://akson.sgh.waw.pl/~trusek/gee/papers/paper-Yegorov-Wirl.pdf)
• Consider a game with two periods. The period 1 lasts until 2030. In
this period there are 3 main gas importers: EU, USA and Core Asia,
which remain main importers also in the 2nd period.
• Gas exporters have broad oligopoly in period 1 and narrow
oligopoly in period 2. Future oligopoly depends very much on
present policy chosen by EU.
• Narrow oligopoly contains 3 main holders of gas reserves: Russia,
Iran, Qatar.
• Players choose intensity of exploitation and shares of investment in
different infrastructure.
• The more is competition in period 1 (it also depends on EU policy),
the more small players start to deplete their reserves fast, and the
quicker will be the period with narrow oligopoly.
15
Conclusions and Policy implications
• This study looks beyond the year 2030. Long term analysis of trends shows
that the demand for gas imports will grow very fast in the USA and Pacific
Asia, putting EU into fierce competition for gas supplies. By the middle of
the 21st century most of the gas reserves on American and African
continents will be depleted. Russia and Middle East would become the
main gas suppliers. There will be oligopoly-oligopsony relationship, with 3
main producers (Russia, Iran, Qatar) and 3 large consumers (USA, EU,
Pacific Asia). Therefore, Europe will, whether it likes it or not, depend on
Russian gas. The emergence of an Asian market with China up front, and
the possibility of LNG exports frees Russia from its dependence on gas
exports to Western Europe. In the long run, the only viable alternative for
gas supply in EU other than Russia is the Middle East. Therefore, EU
should either invest in pipelines to Iran, or be prepared to pay higher
prices for LNG imports from Middle East.
16
Mathematical Models for Gas
• There are several aspects of gas market that can be modeled
• The first model is related to the optimal split across
investment in two technologies (pipelines and LNG) by one
firm (that can be either a monopolist or taking prices as given)
taking into account cost asymmetry and dynamic benefits
from investment
• The second model studies the effect of positive externality
from gas network development on gas demand in a spatial
framework
• The third model studies the emerging game when transit
country is involved
17
Yegorov, MATHMOD 2009, Vienna
In the specification of Model 1
(when both choke price and
demand slope depend linearly on
capital stock) the nonlinear
interaction between capitals can
lead to emergence of two internal
steady states. However, under
certain parameter values there is
unique saddle point.
18
Model 2. Dynamics of Spatial Infrastructure with
Application to Gas and Forest (Infraday 2007)
• For the industries that produce the output with low
price/weight ratio spatial structure is important. Especially in
the case of land transportation.
• The first model is about the development of a network
around new strategic gas pipeline. Special focus is on external
effect for the dynamic change in the demand for gas.
• The spatial structure is taken here in abstract form: space is
treated as two-dimensional and continuous. Although this
assumption is naturally taken for granted in all natural science
models it is not so common in economics (including new
economic geography), with the exception of some models is
regional science and industrial organization.
19
Fig.1. The Case of Satiation. Demand changes
as D(p,t)= (1-p) [D0 + �ct + �(2Rct-cR2/v)]
y
R
y= v t - v x/c
S1(t)
0
S2(t)
X(t-1)
X(t)
x
y = -v t + v x/c
-R
S(t)=S1(t)+S2(t)
20
Fig.2. Demand Curves. Problem: MaxI(t),p(t) � e-rt C(t)dt,
s.t. dK(t)/dt = I(t)- � K(t),
C(t)=D(K,p)[p-c(K(t))] - I(t) - �I2(t)
Then the optimal pricing at any t is p*(t) =(1+a+bK(t))/2.
p
D(K)
D=D(K)(1-p)
D=D0+�K1/2
D0
D(p,K2)
D(p,K1)
0
0
D(p;K)
K
21
Model 2: F.O.C. and conclusions
• The first order conditions lead now to new dynamic system:
dK/dt= (�-1)/(2 �) - �K,
d�/dt= �(� +r) - �(1-a-bK)2/8K1/2+b/2(D0+ � K1/2)(1-a-bK)
• The numerical calculations show the following results:
for K>0 there exists one saddle (at lower K) and unstable vortex.
Conclusions
• The development of infrastructure influences global demand for gas.
• In this model, the focus is on the evolution of demand for gas driven by
positive externality from the development of gas network. In the case 1 of
high externality this leads to unbounded expansion. In the more realistic
case 2 of moderate externality there exists a unique stable steady state
(saddle).
22
Gas Transit Games
• Gas transit gives rise to different types of games, and both geography and
politics determine their structure. Geography often prevents competition,
especially in the case of unique pipeline via third country. If this pipeline
transit generates revenue above cost level, we have emergence of pie,
with pie-splitting game.
• In principle, there are many possibilities of structures of transit games,
and some of them will be considered below. Here we do not focus on
modelling Ukrainian transit, but can refer to other studies related to its
modelling: Hirschhausen et al (2005), Victor & Victor (2006), Yegorov &
Wirl (2009).
• We focus on the transit game with transit country as net exporter. The
game emerging from the transit of gas from Turkmenistan via Russia is
theoretically richer because here a transit country is also net gas exporter
with substantial market power.
23
24
Turkmen gas game
This problem (Turkmen gas) can be decomposed into two sub-problems:
•
bargaining between Russia and Turkmenistan over gas price PT;
•
optimization problem of Russia taking into account demand function
and bargaining outcome.
• In principle, there exist many possibilities of formal modelling. We can
take into account market power of Russia (large producer) in influencing
European gas price (as we do below) or neglect it (considering European
price fixed). The model can consider or neglect the growing marginal cost
of Russian gas. Here we consider the mix of monopolistic optimization and
bargaining, the set up that reflects well the nature of the process but has
not been studied in economic literature. The main focus is on contrast
between internationally regulated and non-regulated transit.
25
Ukrainian gas transit game
Yegorov, Wirl Zeitschrift fur Energiewirtschaft, 2009, iss.2, p.147-155.
• In 2008, Ukraine has been receiving gas at the price of 170 $/cum, which
was less than half of European price. Since Ukraine holds no intentions of
joining Russia’s geopolitical space after the Orange Revolution in 2004, the
Russian Federation sees no reason to continue subsidizing Ukraine via
lower gas prices.
• Before 2009 the cost of gas transit is 1.7 $/tcm per 100 km, which is
comparable to a similar transit service in Europe. The objective of ensuring
full compensation of any increase in the price of natural gas by simply
raising transit fees (such as from $ 1.7 to $ 9 per 100 km), has been
witnessed in previous rounds of negotiations, which document Ukraine’s
rent-seeking behavior.
• The failure to sign an agreement with Gazprom for 2009 (Gazprom insisted
on the price of $ 450 tcm and full debt repayment up front) caused a gas
conflict in early January 2009 that affected the EU countries as well.
26
Ukrainian gas transit game. 2
27
Gas Games: Results
• We see that pie size depends on Russian strategy, and it is transit
producing country (here Russia) who defines the game. In the considered
case Russia allowed all gas from Turkmenistan to be transited, but then
bargained with it about price on the border. The different models of
transit relations demonstrate that both the emergence of game and its
structure depend on geography, internationals laws and politics.
• Let us focus on structural differences emerging from economics and
geography. The main structural difference between cases A (Ukraine as
transit country) and B (Russia as transit country) is in export property of
that country. While Ukraine is net gas importer, Russia is net gas exporter.
• Thus, while export of Russian gas via Ukraine only exploits its pipeline
infrastructure, export of gas from Turkmenistan via Russia besides that has
also an impact on Russian export price.
28
International Gas Markets: Economics,
Geography & Politics (IAEE 2009)
Gas market is characterized by:
• Preferences of consumers (that can also evolve over time, as the response
of product availability for particular consumer);
• Production functions (also evolving, taking into account depletion of
resources and new discoveries);
• Optimization of extraction paths given market structure and rational
expectation about its evolution (a typical model in resource economics);
• Optimization of sequence of investments in different infrastructure
(subject to perturbations due to externalities and new discoveries)
• Price pattern (the function of both space and time)
• This requires development of new interdisciplinary approach, that would
integrate economics, geography and politics into formal mathematical
models.
29
Literature.1
•
•
•
•
•
1.
Victor, N.; Victor, D. Bypassing Ukraine: exporting Russian gas to Poland
and Germany. In: Natural Gas and Geopolitics: From 1970 to 2040, D.Victor,
A.Jaffe, M.Hayes, Eds.; Cambridge University Press, 2006, pp.122-168.
2.
Olcott, M.B. International gas trade in Central Asia: Turkmenistan, Iran,
Russia and Afghanistan. In: Natural Gas and Geopolitics: From 1970 to 2040,
D.Victor, A.Jaffe, M.Hayes, Eds.; Cambridge University Press, 2006, pp.202-233.
3.
Hashimoto, K.; Elass, J.; Eller, S. Liquefied natural gas from Qatar: The
Qatargas project. In: Natural Gas and Geopolitics: From 1970 to 2040, D.Victor,
A.Jaffe, M.Hayes, Eds.; Cambridge University Press, 2006, pp.234-267.
4.
Hayes, M.; Victor, D. Politics, markets and the shift to gas: insights from
the seven historical case studies. In: Natural Gas and Geopolitics: From 1970 to
2040, D.Victor, A.Jaffe, M.Hayes, Eds.; Cambridge University Press, 2006,
pp.319-356.
5.
Hartley, P.; Medlock, K.III. The Baker Institute World Gas Trade Model.
In: Natural Gas and Geopolitics: From 1970 to 2040, D.Victor, A.Jaffe, M.Hayes,
Eds.; Cambridge University Press, 2006, pp.357-406.
30
Literature.2
• 6. Hotelling, H. Stability in Competition. Economic Journal, 1929, 39, pp.41-57.
• 7. Isard, W. General Theory: Social, Political, Economic, and Regional. MIT
Press, 1969, 1040 p.
• 8. Von Hirschhausen, C.; Menihart, B. and Pavel, F. Transporting Russian Gas to
Western Europe – A Simulation Analysis. The Energy Journal, 2005, v.26, no.2.
• 9. Yegorov Y., Wirl F. (2009) Ukrainian Gas Transit Game, forthcoming
Zeitschrift für Energiewirtschaft.
• 10. Hartley, P.; Medlock, K. III. Potential Futures for Russian Natural Gas
Market. The Energy Journal, Special Issue: World Natural Gas Markets and
Trade: A Multi-Modeling Perspective, 2009, p.77-95.
• 11. Ericson R. (2009) Eurasian Natural Gas Pipelines: The Political Economy of
Network Interdependence. Eurasian Geography and Economics, v.50, No,1,
pp.28-57.
• 12. Bilgin M. (2009) Geopolitics of European natural gas demand: Supplies
from Russia, Caspian and the Middle East. – Energy Policy,
doi:10.1016/j.enpol.2009.05.070
31
Gas Transit, Geopolitics and Emergence of
Games with Application to CIS Countries
Yegorov & Wirl, USAEE WP 2010
•
These works show the importance of interaction between economics, politics
and geography in the case of gas in general. We can observe different market
organization for natural gas in different parts of the world. On one hand, we
have spatial (nodal) pricing of natural gas in Northern America that correctly
reflects substantial infrastructure and delivery cost. On the other hand, we
have the tendency to liberalize internal gas markets in the EU that seems to
neglect spatial differences in delivery cost in favour of other arguments.
Depletion of world gas resources makes delivery more costly and space more
heterogeneous, and this naturally leads to growing local monopoly power of
some gas producers. At the same time, development of LNG technology makes
world markets more integrated and transforms this market from previously
regional to more global. Under these conditions, it becomes clear that purely
economic arguments about market structure and natural gas policy not always
work. And it becomes increasingly important to develop interdisciplinary
science that will take into account those complexities.
32
Literature survey
• The works in regional science have shown that spatial (or geographical)
factor can produce effects different from those of non-spatial economics.
Thus, it represents an alternative self-organizing force. When we deal with
gas markets, spatial distribution of consumers also plays a role similar to
(Hotelling, 1929) model. However, we have also other effects. First of all,
geography plays the crucial role in the selection of paths of pipelines or
LNG ports. In abstract setting, one should solve an optimization problem
of selecting optimal trajectories of pipelines in 2-dimensional space. Even
apart from the issues of optimal capacity, associated risks and political
constraints, we have a problem with spatial density of discovered gas
deposits and density of consumption across the world, and a continuum of
possible paths. Fortunately, many of the conceivable paths can be
aggregated under one label, e.g., NABUCCO refers to many potential
realizations with the common feature of connecting the Caspian region
with Europe. Therefore, we can deal with a rather small set of generalized
strategic pipelines, meaning by each pipeline not an exact project with
fixed route and capacity, but a class of ideas.
Therefore, economic theory must be complemented. We can conclude
that for natural gas it is necessary to incorporate geopolitics and
technology into formal economic model.
33
Necessity for new approach. 1
• Traditional economic theory considers consumers with preferences and
producers with technologies. The reality of gas markets shows that this is not
enough, because they have to be connected to the market. Connection (via
pipelines or LNG) requires substantial investment that is comparable with
the production cost. After connection to the market market participants find
themselves in asymmetric conditions. This is not only asymmetric distance to
the market that puts some more distant producers or consumers in less
favourable position, but also a possibility for a third party to bring negative
externality. The most typical example is the delay of pipeline construction
between Turkmenistan and Pakistan due to political uncertainty in
Afghanistan. This changes the whole market structure. Interestingly, most of
externalities have geographical or political origin.
• In the case of gas market we have a clear intertemporal problem, because
associated investment in infrastructure is durable. The problem is the conflict
between low flexibility of long term contracts and the desirability to secure
the investment in infrastructure.
34
About Spatial Pricing of Gas
The market structure (for gas from Turkmenistan - over Russia) is an outcome
of its location and geopolitical obstacles. Nowadays, there are many
discussions about NABUCCO. Hartley and Medlock (2009) predict the
preservation of dependence of Central Asian countries on Russian transit in
future. The problem is not in the delay of constructing NABUCCO but how
little it changes the situation for Turkmenistan. Given that alternative transit
cost may be as expensive for Turkmenistan as its present transit via Russia, it
will only upgrade bargaining power of Turkmenistan in its game with Russia.
The problem is the distance. It is likely that the cost of transit of Russian gas
over Russian territory is comparable or even higher than the cost of its
extraction. This partly justifies the difference between Russian domestic price
for gas and price for its export. But the similar argument can also be applied to
Turkmenistan. We argue that even in competitive transit environment, the
price of natural gas on the border of Turkmenistan should be substantially
lower than European price, simply because of high cost of competitive transit.
35
Can Games Be Reduced?
• What factors can influence the structure of transit games?
• In the short run, this may be updating of international law. In the long run,
it is more geopolitics that can prevent the construction of alternative
pipelines either by direct blocking or worsening of investment climate.
• Transits allow for power abuse, which can put exporting country with no
direct access to consumers into a weak position. In these examples we
have seen that one country (here Russia) can be in different positions:
abused by Ukraine and abusing Turkmenistan.
• If we start from the rights of producers and consumers to contract directly,
then bargaining power of transit countries can be reduced or eliminated
by corresponding amendments to international law. However, since
geopolitics also influences such legal decisions, we do not always observe
economically efficient legal implementations.
36
Spatial Oligopoly for Gas. 1
• Here we will touch another aspect of gas market that is related to its
spatial structure. If gas pipeline network is rather dense and if we have
few suppliers (with particular spatial locations), then we can use the
approach of Hotelling (1929).
• The two-dimensional set up has been elaborated by Yegorov (2000). As it
was shown in Yegorov (2000), introduction of special coordinates (elliptichyperbolic, with location of production points in focuses) after integration
allows to write the corresponding model as 1-dimensional Hotelling model
with firms at the end of interval and some heterogeneous demand
density. For a broad set of densities such a problem has Nash equilibrium
in pure strategies for linear transport costs, and thus the criticism of
original Hotelling's model by d'Aspremont, Gabzgewich and Thisse (1979)
does not apply.
• It is also shown that for rich class of non-uniform densities Nash
equilibrium in pure strategies also exists.
37
Spatial Oligopoly for Gas. 2
• The objective is to apply this model for the case of European gas market.
While in reality many producers export natural gas to EU, for simplicity we
can concentrate on two main suppliers at present: Russia and Norway.
According to BP Statistics, natural gas imports from Russia and Norway
form 100 % of gas imports for 8 European countries, between 50 and 100
% - for 10 more countries, and less than 50 % for only 8 countries.
• Two-dimensional Hotelling model (Yegorov, 2000) can be used for the
description of spatial competition between producers of natural gas
(Russia and Norway) and European consumers. Locations of production
are fixed (immobile), gas transport network in Europe is dense (see map 1)
and consumers (demand density) are heterogeneous. While in classical
Hotelling model for any pair of prices there is only one indifferent
consumer, in 2-dimensional set up with Euclidean metric, indifferent
consumers are located on hyperbola.
• The function Y=R/(R+N) (relative weight of imports from Russia) is
regressed on index 0<x<1 (relative location of a country).
38
39
Importer
Rus. Share Nor.share
R/(R+N)
0< x <1
Belgium
United
Kingdom
0,026
0,491
0,05
0,05
0,000
0,586
0
0,05
Netherlands
0,122
0,371 0,247312
0,1
France
0,226
0,448 0,335547
0,2
Germany
0,425
0,284 0,599595
0,3
Spain
0,000
0,196
0
0,4
Switzerland
0,117
0,060 0,660377
0,4
Italy
Czech
Republic
0,329
0,124 0,725831
0,6
0,745
0,255 0,745075
0,7
Slovenia
0,509
0,000
1
0,7
Austria
0,749
0,104 0,877743
0,8
Croatia
0,875
0,000
1
0,8
Greece
1,000
0,000
1
0,8
Poland
0,667
0,000
1
0,8
Serbia
1,000
0,000
1
0,85
Bulgaria
1,000
0,000
1
0,9
Finland
1,000
0,000
1
0,9
Hungary
0,749
0,000
1
0,9
Romania
0,521
0,000
1
0,9
Slovakia
1,000
0,000
1
0,9
Turkey
0,757
0,000
1
0,9
Latvia
1,000
0,000
1
0,95
Lithuania
1,000
0,000
1
0,95
Table gives the shares of
Russian (R) and Norwegian (N)
gas for different consumers in
Europe. Also, location of
countries is characterized by x
– coordinate on the interval
0<x<1 connecting gas entry
points of Norway (x=0) and
Russia (x=1). See the map.
Next graph gives regression of
Russian share in gas imports,
R/(R+N), on location x.
40
Dependence of Russian share in
gas imports on country’s location x
Plot R/(R+N) as function of distance x
1
0,9
0,8
y = 1,0698x + 0,0589
R² = 0,8543
0,7
0,6
R/(R+N)
0,5
Linear (R/(R+N))
0,4
0,3
0,2
0,1
0
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
41
Future of Natural Gas in EU: Will Geopolitics
Take over Economics? (IAEE 2015)
https://www.researchgate.net/publication/277531087_Future_of_Natural_G
as_in_EU_Will_Geopolitics_Take_over_Economics
Just a few years ago, everybody was forecasting the expansion of natural gas consumption in
EU and the necessity to increase gas imports due to decline in EU gas production. This
strategy was justified by the necessity to fulfill EU objective 20-20-20 due to the fact that
coal-gas substitution was a cheaper option to reduce CO2 emissions comparing to fast
transition to solar and wind energy with not yet mature technologies. The actual evolution,
especially for Europe, went in a different way. Germany spends a lot in subsidies for solar
and wind power plants that are not yet competitive due to high fixed costs. They also bring a
lot of problems to electricity balance due to randomness in supply. At the same time, gas
power plants loose competition to coal plants due to inefficiency of carbon markets in
Europe (Yegorov & Wirl, 2014). Indeed, under current market structure for electricity in EU,
investment in gas powered plants is not welcome not only in nuclear-rich France but also in
Germany which stays with substantial fraction of coal. Geopolitics plays a high role for
natural gas markets today. Theoretical justification comes from high role of transport costs
(Yegorov & Wirl, 2010). This leads to monopolism of major pipelines and gas transit games
if they cross a third country. While it has been thought that LNG will raise competition and
lead to a unique world price for gas, this did not happen. Too high costs (when not only
variable costs play role) lead to paradox (from the view point of economic theory) scenario
where arbitrage is not utilized for many years.
42
Will Geopolitics Take over Economics? -2
•
•
•
•
•
•
•
Just a few years ago, everybody was forecasting the expansion of natural gas
consumption in EU and the necessity to increase gas imports due to decline in EU
gas production. This strategy was justified by the necessity to fulfill EU objective
20-20-20 due to the fact that coal-gas substitution was a cheaper option to reduce
CO2 emissions comparing to fast transition to solar and wind energy with not yet
mature technologies.
Now we observe the decline of natural gas imports by Europe. While in 2010 it has
imported 288 bcm of gas (excluding Norway), in 2013 the volume of imports was
only 260 bcm (WEO2014, Fig.4.9).
Given that the largest gas deposits holders of conventional gas are Russia, Iran and
Qatar and given that Russia is already the largest gas exporter, one should expect
greater role of Iran (in fact with cheap cost) in the nearest future.
If we look at IEA predictions on future gas trade under new policies scenario
(WEO2014, Fig.4.13) we can observe several facts:
European gas imports will grow from 230 bcm in 2012 to 400 bcm in 2040;
This will happen not due to growing gas demand (growthonly 100 bcm till 2040),
but due to decline in European gas production (import grows from 48% to 65%);
The role of USA in shale gas exports will be low.
43
Will Geopolitics Take over Economics? - 3
•
•
•
•
•
•
•
Under current market structure for electricity in EU, investment in gas powered
plants is not welcome (cheap coal, no carbon tax).
Germany reaches the objective of GHG emissions reduction at too high costs. The
subsidies to PV plants cost many billions euro per year, while cost is still high (Fig.A).
Geopolitics plays high role for natural gas markets. Theoretical justification comes
from high role of transport cost for natural gas that make geography and politics at
least as important as economics (Yegorov & Wirl, 2010). This leads to monopolism
of major pipelines and gas transit games if they cross a third country.
There is no global shortage of natural gas in the coming several decades, contrary to
oil, where production peak (at least for conventional oil) either has already occurred
or will come soon (Fig. B).
Future conventional gas market will be dominated by Russia, Iran and Qatar.
If EU will not use fully this gas potential, and Asia (especially China) can take over
potential future gas supply.
The year 2014 has sharply demonstrated the difference between economic and
geopolitical approach. It is becoming increasingly clear that Europe will eventually
suffer economically from its shift to geopolitics. Blocking South and Nord Stream is
not beneficial for EU; it will lose together with Russia.
44
Figures
Fig. A. Cost of electricity production
(from Philippe Siaquet, Vienna 2014)
Fig. B. Future of oil production.
WEO 210 (IAE).
45
Conclusions
• Markets for natural gas can be modelled in a theoretical way. We have a
set of consumers with their preferences for gas and gas producers in
different location, with asymmetric access to the market; a set of links
(spatial) and contracts (temporal) between them; investors who invest in
links between producers and consumers; potential investment projects,
among which investors choose those with higher NPV under current
geopolitical conditions.
• Links between producers and consumers are evolving over time. It makes
sense to focus on reductions like gas transit games and geopolitical
externalities. Analysis of simple models related to gas transit games and
Hotelling-type spatial competition and gas transit games reveal that
geography and politics play at least as important role as economics in
modelling of real gas markets.
• Geopolitical issues in gas markets are very important today.
46