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Strategic Eurasian Natural Gas Model for Energy Security (Revised 6 April 2011)

Author

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  • Chyong, C-K.
  • Hobbs, B. F.

Abstract

The mathematical formulation of a large-scale equilibrium natural gas simulation model is presented. Although large-scale natural gas models have been developed and used for energy security and policy analysis quite extensively (e.g., Holz (2007), Egging et al. (2008), Holz et al. (2009) and Lise et al. (2008)), this model differs from earlier ones in its detailed representation of the structure and operations of the Former Soviet Union (FSU) gas sector. In particular, the model represents: (i) market power of transit countries, (ii) transmission pipelines in Russia, Ukraine, Belarus and Central Asia, (iii) differentiation among gas production regions in Russia, and (iv) gas trade relations between FSU countries (e.g., Gazprom’s re-exporting of Central Asian gas). To demonstrate the model, a social benefit-cost analysis of the Nord Stream gas pipeline project from Russia to Germany via the Baltic Sea is provided. It is found that Nord Stream project is profitable for its investors and the project also improves social welfare in all market power scenarios. Also, if transit countries (Ukraine and Belarus) exert substantial market power then the economic value of Nord Stream to its investors and to society improves substantially. We also found that the value of Nord Stream investment is rather sensitive to the degree of downstream competition in European markets and that lack of downstream competition might result in the negative value of the Nord Stream system to Gazprom.

Suggested Citation

  • Chyong, C-K. & Hobbs, B. F., 2011. "Strategic Eurasian Natural Gas Model for Energy Security (Revised 6 April 2011)," Cambridge Working Papers in Economics 1134, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1134
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    Keywords

    Complementarity modelling; optimization; Nord Stream; South Stream; Russia; transit; pipeline; Gazprom; energy security; Europe;

    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

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