Gas pipeline business: Market power, sabotage, and sanctions

This paper examines the dynamics of the international natural gas market, focusing on the strategic interplay between Liquefied Natural Gas (LNG) and pipeline transportation. LNG provides flexibility but incurs higher costs, whereas pipelines are more cost-efficient but foster geopolitical dependencies. We develop a model involving a gas-producing country and two consumer nations linked by fixed-capacity pipelines, analyzing equilibrium pricing, trade volumes, and the effects of shocks such as pipeline destruction and export embargoes. The analysis reveals that the pipeline capacities in relation to the stock of gas resources shape competition among pipeline owners, influencing rent distribution and market power. The destruction of a pipeline typically reduces the pipeline rents of the connected countries and increases the rents of the bystander country. However, we also highlight the conditions under which shocks to the pipeline infrastructure or politically induced trade restrictions do not affect the producer’s rents, emphasizing the critical roles of intertemporal extraction decisions and the substitution potential between LNG and pipeline exports. Our findings inform both economic and geopolitical assessments of gas trade infrastructure and policy interventions.