Pipeline Power

Gas from the Russian Federation accounts for a quarter of the consumption in the European Union and for more than 40% of its imports. In 2010 essentially all of these imports depended on transit through either Belarus or Ukraine, both being major importers of Russian gas themselves. On both routes conflicts over transit fees and gas prices led to several interruptions of supply, the most serious one in January 2009 when transport through Ukraine was shut down for three weeks with dire consequences for heating and power supply in the Balkan. European policy makers are struggling to find a coherent response to these challenges. On the one hand new pipeline links with Russia are needed to diversify transit routes for Russian gas. On the other hand, such pipelines have the potential to further increase the dependency on Russian gas and reduce the viability of investments securing supplies from alternative sources. In this paper we analyze three controversial pipeline projects (Nord Stream, South Stream and Nabucco), which have the potential to thoroughly transform the Eurasian supply system for natural gas. Even if not needed for transporting additional gas, pipelines may have a substantial impact on the balance of power in the network. To assess the pipelines’ impact on bargaining power we develop a disaggregated quantitative model of the Eurasian gas network. The interdependencies among the players are represented by a game in characteristic function form, which is solved using the Shapley value. The power index thus obtained reflects the production possibilities, market size and the architecture of the transport network. When the latter is changed trough a new pipeline, we obtain a different game entailing gains for some and losses for other players. We represent the interdependencies among the players by a game in value function form. The value function captures the essential economic features, such as the geography of the network, different cost of alternative pipelines, demand for gas in the different regions, production cost, etc. It also reflects institutional features, such as ownership and access rights Our analysis shows that Nord Stream’s strategic value is huge, justifying the high investment cost for Germany and Russia. It severely curtails the power of transit countries Belarus and Ukraine and the EU’s main producer Netherlands. In principle, South Stream fulfils a similar strategic role. However, with Nord Stream already in place, the additional leverage obtained through South Stream is too small to make the project viable for its main beneficiaries Russia, Germany and some central European countries. Nabucco has a large potential to curtail Russia’s power, but the benefits accrue mainly to Turkey, which would diversify its gas imports and become a major potential hub. The gains for the EU, in contrast, are negligible. With financial support from Turkey and Iraq the project is strategically viable but our results cast doubts on the prospects of raising the necessary funds within EU. Somewhat surprisingly, South Stream has little effect on Nabucco’s viability. The EU Commission’s concern (or Russian hopes) that South Steam might pre-empt the investment in a southern corridor appear unfounded.