IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v44y2014icp198-211.html
   My bibliography  Save this article

Strategic Eurasian natural gas market model for energy security and policy analysis: Formulation and application to South Stream

Author

Listed:
  • Chyong, Chi Kong
  • Hobbs, Benjamin F.

Abstract

The mathematical formulation of a strategic Eurasian natural gas market model is presented. The model represents horizontal oligopolistic relationships among producers, bilateral market power between producer (Russia) and transit (Ukraine) countries, detailed transport constraints, and operation decisions over a 20year time horizon. To demonstrate the model's capabilities, a financial and market analysis of the proposed South Stream gas pipeline from Russia via the Black Sea to South Europe is summarized. Insights obtained include the following. First, expectations of high demand growth in Europe and/or transit risks do not justify the construction of the South Stream pipeline because under all demand and Ukraine transit interruption scenarios, the net benefits to the South Stream participants are negative (the NPV ranges from −$1.9billion (bn) to −$7.4bn). Second, Ukraine's perception of high transit market power vis-à-vis Russia may trigger the construction of the otherwise unprofitable South Stream project. Thus, under Ukraine's high transit market power scenario, the NPV of South Stream ranges between $2.4bn and $24.5bn. Third, we find that the South Stream investment increases the efficiency of the European gas market under the following conditions: (i) when gas demand in Europe grows 2% per year up to 2030, (ii) when Ukraine poses high transit market power, or (iii) under a combination of severe transit risks through Ukraine and low demand scenarios in Europe. It should be noted that the value of South Stream to both its project sponsors and the market as a whole is much higher when Ukraine exercises transit market power than under the high demand scenario. Therefore, whether Ukraine is likely to wield market power is crucial to the success of the South Stream project because that is the only scenario in which the project yields both a positive expected NPV to its sponsors and the highest value to the market as a whole.

Suggested Citation

  • Chyong, Chi Kong & Hobbs, Benjamin F., 2014. "Strategic Eurasian natural gas market model for energy security and policy analysis: Formulation and application to South Stream," Energy Economics, Elsevier, vol. 44(C), pages 198-211.
    • Handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:198-211
    DOI: 10.1016/j.eneco.2014.04.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988314000905
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cremer, Helmuth & Gasmi, Farid & Laffont, Jean-Jacques, 2003. "Access to Pipelines in Competitive Gas Markets," Journal of Regulatory Economics, Springer, vol. 24(1), pages 5-33, July.
    2. Gabriel, Steven A. & Zhuang, Jifang & Kiet, Supat, 2005. "A large-scale linear complementarity model of the North American natural gas market," Energy Economics, Elsevier, vol. 27(4), pages 639-665, July.
    3. Egging, Ruud, 2013. "Benders Decomposition for multi-stage stochastic mixed complementarity problems – Applied to a global natural gas market model," European Journal of Operational Research, Elsevier, vol. 226(2), pages 341-353.
    4. Lise, Wietze & Hobbs, Benjamin F. & van Oostvoorn, Frits, 2008. "Natural gas corridors between the EU and its main suppliers: Simulation results with the dynamic GASTALE model," Energy Policy, Elsevier, vol. 36(6), pages 1890-1906, June.
    5. Holz, Franziska & von Hirschhausen, Christian & Kemfert, Claudia, 2008. "A strategic model of European gas supply (GASMOD)," Energy Economics, Elsevier, vol. 30(3), pages 766-788, May.
    6. Gabriel, S.A. & Rosendahl, K.E. & Egging, Ruud & Avetisyan, H.G. & Siddiqui, S., 2012. "Cartelization in gas markets: Studying the potential for a “Gas OPEC”," Energy Economics, Elsevier, vol. 34(1), pages 137-152.
    7. Bolle, Friedel & Ruban, Rostyslav, 2007. "Competition and Security of Supply: Let Russia Buy into the European Gas Market!," Discussion Papers 258, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    8. Boucher, Jacqueline & Smeers, Yves, 1987. "Economic forces in the European gas market -- a 1985 prospective," Energy Economics, Elsevier, vol. 9(1), pages 2-16, January.
    9. Friedman, James, 1993. "Oligopoly theory," Handbook of Mathematical Economics,in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 11, pages 491-534 Elsevier.
    10. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1998. "Increased Competition on the Supply Side of the Western European Natural Gas Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-18.
    11. Ibrahim Abada & Steven Gabriel & Vincent Briat & Olivier Massol, 2013. "A Generalized Nash–Cournot Model for the Northwestern European Natural Gas Markets with a Fuel Substitution Demand Function: The GaMMES Model," Networks and Spatial Economics, Springer, vol. 13(1), pages 1-42, March.
    12. SMEERS, Yves, 1997. "Computable equilibrium models and the restructuring of the European electricity and gas markets," CORE Discussion Papers 1997061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Egging, Ruud & Gabriel, Steven A. & Holz, Franziska & Zhuang, Jifang, 2008. "A complementarity model for the European natural gas market," Energy Policy, Elsevier, vol. 36(7), pages 2385-2414, July.
    14. Yves Smeers, 1997. "Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-31.
    15. Sagen, Eirik Lund & Tsygankova, Marina, 2008. "Russian natural gas exports--Will Russian gas price reforms improve the European security of supply," Energy Policy, Elsevier, vol. 36(2), pages 867-880, February.
    16. Christian Growitsch & Harald Hecking & Timo Panke, 2014. "Supply Disruptions and Regional Price Effects in a Spatial Oligopoly—An Application to the Global Gas Market," Review of International Economics, Wiley Blackwell, vol. 22(5), pages 944-975, November.
    17. Finn Roar Aune, Knut Einar Rosendahl and Eirik Lund Sagen, 2009. "Globalisation of Natural Gas Markets - Effects on Prices and Trade Patterns," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 39-54.
    18. Boucher, Jacqueline & Smeers, Yves, 1985. "Gas trade in the European community during the 1970s : A model analysis," Energy Economics, Elsevier, vol. 7(2), pages 102-116, April.
    19. Egging, Rudolf G. & Gabriel, Steven A., 2006. "Examining market power in the European natural gas market," Energy Policy, Elsevier, vol. 34(17), pages 2762-2778, November.
    20. Knut Einar Rosendahl & Eirik Lund Sagen, 2009. "The Global Natural Gas Market: Will Transport Cost Reductions Lead to Lower Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 17-40.
    21. Ferris, Michael C. & Munson, Todd S., 2000. "Complementarity problems in GAMS and the PATH solver," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 165-188, February.
    22. Silve, F. & Noel, P., 2010. "Cost Curves for Gas Supply Security: The Case of Bulgaria," Cambridge Working Papers in Economics 1056, Faculty of Economics, University of Cambridge.
    23. Dockner, Engelbert J, 1992. "A Dynamic Theory of Conjectural Variations," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 377-395, December.
    24. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
    25. David G. Tarr & Peter D. Thomson, 2017. "The Merits of Dual Pricing of Russian Natural Gas," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 14, pages 315-336 World Scientific Publishing Co. Pte. Ltd..
    26. Christian von Hirschhausen & Berit Meinhart & Ferdinand Pavel, 2005. "Transporting Russian Gas to Western Europe A Simulation Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 49-68.
    27. Gabriel, Steven A. & Zhuang, Jifang & Egging, Ruud, 2009. "Solving stochastic complementarity problems in energy market modeling using scenario reduction," European Journal of Operational Research, Elsevier, vol. 197(3), pages 1028-1040, September.
    28. Waft Grais & Kangbin Zheng, 1996. "Strategic Interdependence in European East-West Gas Trade: A Hierarchical Stackelberg Game Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 61-84.
    29. GABRIEL, Steven & SMEERS, Yves, 2005. "Complementarity problems in restructured natural gas markets," CORE Discussion Papers 2005037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    30. Zhuang, Jifang & Gabriel, Steven A., 2008. "A complementarity model for solving stochastic natural gas market equilibria," Energy Economics, Elsevier, vol. 30(1), pages 113-147, January.
    31. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
    32. Irina Suleymanova & Franz Hubert, "undated". "Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem," Energy and Environmental Modeling 2007 24000059, EcoMod.
    33. Gijsbert Zwart & Machiel Mulder, 2006. "NATGAS: a model of the European natural gas market," CPB Memorandum 144, CPB Netherlands Bureau for Economic Policy Analysis.
    34. Hecking, Harald & Panke, Timo, 2012. "COLUMBUS - A global gas market model," EWI Working Papers 2012-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    35. Peter R. Hartley and Kenneth B. Medlock III, 2009. "Potential Futures for Russian Natural Gas Exports," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 73-96.
    36. Lise, Wietze & Hobbs, Benjamin F., 2008. "Future evolution of the liberalised European gas market: Simulation results with a dynamic model," Energy, Elsevier, vol. 33(7), pages 989-1004.
    37. Maroeska G. Boots, Fieke A.M. Rijkers and Benjamin F. Hobbs, 2004. "Trading in the Downstream European Gas Market: A Successive Oligopoly Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-102.
    38. SMEERS, Yves, 2008. "Gas models and three difficult objectives," CORE Discussion Papers 2008009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    39. Ruud Egging, Franziska Holz, Christian von Hirschhausen and Steven A. Gabriel, 2009. "Representing GASPEC with the World Gas Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 97-118.
    40. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1995. "Effects of Liberalizing the Natural Gas Markets in Western Europe," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-112.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:appene:v:230:y:2018:i:c:p:403-416 is not listed on IDEAS
    2. repec:aen:journl:ej37-si3-kiss is not listed on IDEAS
    3. Richter, Philipp M. & Holz, Franziska, 2015. "All quiet on the eastern front? Disruption scenarios of Russian natural gas supply to Europe," Energy Policy, Elsevier, vol. 80(C), pages 177-189.
    4. Chi Kong Chyong and David M. Reiner, 2015. "Economics and Politics of Shale Gas in Europe," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    5. Robert A. Ritz, 2015. "Strategic investment and international spillovers in natural gas markets," Cambridge Working Papers in Economics 1510, Faculty of Economics, University of Cambridge.
    6. Tobias Baltensperger & Rudolf M. Fuchslin & Pius Krutli & John Lygeros, 2015. "European Union gas market development," Papers 1512.05343, arXiv.org.
    7. Chi-Kong Chyong, 2015. "Markets and long-term contracts: The case of Russian gas supplies to Europe," Cambridge Working Papers in Economics 1542, Faculty of Economics, University of Cambridge.
    8. Yang, Zaifu & Zhang, Rong & Zhang, Zongyi, 2016. "An exploration of a strategic competition model for the European Union natural gas market," Energy Economics, Elsevier, vol. 57(C), pages 236-242.
    9. Foster, John & Wagner, Liam & Liebman, Ariel, 2015. "Modelling the Electricity and Natural Gas Sectors for the Future Grid: Developing Co-Optimisation Platforms for Market Redesign," MPRA Paper 70114, University Library of Munich, Germany.
    10. repec:eee:eneeco:v:66:y:2017:i:c:p:466-479 is not listed on IDEAS
    11. Baltensperger, Tobias & Füchslin, Rudolf M. & Krütli, Pius & Lygeros, John, 2016. "Multiplicity of equilibria in conjectural variations models of natural gas markets," European Journal of Operational Research, Elsevier, vol. 252(2), pages 646-656.
    12. Schulte, Simon & Weiser, Florian, 2017. "Natural Gas Transits and Market Power - The Case of Turkey," EWI Working Papers 2017-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), revised 15 Aug 2017.
    13. Robert A. Ritz, 2016. "Strategic investment, multimarket interaction and competitive advantage: An application to the natural gas industry," Cambridge Working Papers in Economics 1603, Faculty of Economics, University of Cambridge.

    More about this item

    Keywords

    Natural gas; Computational market equilibrium; Complementarity model; Nord Stream; South Stream; Gazprom; Energy security; Market power;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:198-211. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.