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Weekly Updates1. INTRODUCTION
The scenario of a cartel of natural gas producers, sometimes called a "GASPEC", is an important issue in international natural gas trade and has occupied a central role in the Energy Modeling Forum 23 study (EMF 2007). The three countries with the biggest natural gas reserves account for more than 50%: Russia: 25%, Iran: 16%, and Qatar: 14% (BP, 2008). Dwindling gas reserves in worldwide consuming countries contribute to worries over future gas supplies.
Although the world's reserves-to-production ratio is about 60 years, it is much lower for North America (10 years) and Europe (24 years). Over the years, many countries have become largely dependent on importing gas and due to depletion of reserves more countries will rely on imports to cover significant parts of their gas consumption. Security of supply has become a concern of import-dependent countries, encompassing both infrastructural risks as well as political and economic uncertainties (Stern, 2007).
Proving the existence of cartel behavior in real markets is difficult. Salant (1976) and Pindyck (1978) were among the first to address the market power of OPEC in the oil market. Al-Qahtani et al. (2008) provide an extensive literature overview of the research related to the role of OPEC in the global oil market. To the best of our knowledge there is no model available to-date to adequately characterize the effects of cartel behavior in the world gas market. So far, the treatment of a potential gas cartel has been mainly qualitative, with some quantitative support from models that were not originally designed for such an analysis. For example, Perner and Seliger (2003) introduce cartel behavior "by hand" in an otherwise competitive model of international gas trade. They show lower pipeline expansion by the cartel members and higher investments by the fringe; LNG expansion proceeds slower in the Cartel Case, too. Since Perner and Seeliger (2003) assume Russia not to be part of the cartel, comparisons should be drawn with care. The difficulty of implementing cartel behavior in models of international gas trade was also the reason why, despite some discussion, no "Cartel Case" was explicitly included in the EMF 23 scenario design (EMF, 2007).
Another important issue for future natural gas trading is the development of capacities, both upstream (i.e., in natural gas production, pipelines, and LNG liquefaction capacities), and downstream (i.e., regasification terminals, storage, and distribution pipeline systems). Major investments in infrastructure will be necessary in the coming decades to transport additional volumes of natural gas over increasingly longer distances, requiring several trillions of dollars of investment (Cayrade, 2004, Finon and Locatelli, 2008 and IEA, 2003). However, so far research has not explicitly considered the impact that different market structures could have on infrastructure expansions.
In this paper, two important topics in the longer-term future of the natural gas industry are explored: the potential collusion between some exporting countries, and investments in infrastructure. The World Gas Model (WGM), a dynamic strategic representation of world gas production, trade, and consumption between 2005 and 2030 is used for the analysis. WGM is an extension of the European Gas Model described in Egging et al. (2008). The main contribution of this paper is: i) to illustrate how and where market driven infrastructure expansions will occur over the next decades; and ii) how more collusion in the global natural gas market could affect capacity expansions, trade-flows, consumption, production and price levels in the period up to 2030.
The organization of this paper is as follows: in Section 2 there is a brief discussion of the likelihood of the formation of a cartel by a group of exporting countries. Section 3 illustrates some technical modeling aspects and the main features and extensions of the World Gas Model, including mixed complementarity problem (MCP) and cartel modeling, as well as an introduction to the endogenized investment decisions. Section 4 describes the data and the cases analyzed our Base Case and a Cartel Case, for the period 2005-2030. In addition, a scenario is run where the production capacities of certain exporting countries are constrained exogenously. Section 5 provides a discussion of results and their interpretation. Lastly, Section 6 provides conclusions and possible future research directions.
2. FROM GECF TO GASPEC?
The development of the "Gas Exporting Countries Forum" (GECF) has spurred concerns about the potential formation of a cartel on the world natural gas market. The GECF was formally set up in 2001. Since then, it has developed into a formal organization with broadening membership. (1) Several GECF countries are also OPEC members.
Is there a real danger of the GECF becoming a cartel, with a prominent role such as OPEC in the petroleum industry? The literature is divided on this issue, and so are industry experts and politicians. On the one hand, it is argued that the danger of a cartel is high. Observers point to the fact that OPEC, created in September 1960, also was slow in becoming a serious organization, but became so in the wake of the world oil market turmoil in 1973. Recent moves of individual countries show a tendency towards collusion in gas as well. Thus, Darbouche (2007) indicates closer Russian-Algerian gas cooperation, based on an extensive Memorandum of Understanding. According to Darbouche (2007), the GECF suffers from a weak institutional and organizational structure, but these conditions could change with Russia's recent involvement. Ehrman (2006) shares this view, when describing various possible structures that a gas cartel could evolve to. She addresses how ties among the GECF countries have gradually strengthened and become more formal over the past few years, as well as some actions taken by the member countries to enhance information exchange and natural gas market analysis.
On the other hand, one might argue that parallels between GECF and OPEC are artificial, and that the gas markets are less subject to market power than the world oil markets. It is argued that the long-term contracts in the gas business would make short-term oligopolistic behavior unrealistic. Also, the interests of the GEFC members, ranging from Iran to Norway (as observer) might be too diverse to pursue joint action (Hallouche, 2006). Finon and Locatelli (2008) analyze several possible forms of collusion, focusing on Russia. They conclude that in the short-term the chance of a successful cartel with just a few members is low since the barriers to entry in the European market are rather low for Gazprom's main competitors. In particular, the North Sea production is a competitive force that may counter-balance the Russian position in the next 20 years. Last but not least, it can be argued that the oil price indexation of many traditional gas contracts already emulates cartel (OPEC) behavior. See also Wagbara (2007) on different interpretations of the GECF.
3. MODELING ASPECTS
3.1 An Equilibrium Model of Natural Gas Markets: the World Gas Model
The World Gas Model (WGM) is a multi-period mixed complementarity model for the global natural gas market, allowing for capacity investments in the liquefied natural gas (LNG), pipeline and storage sectors. The model contains more than 80 countries and regions and covers about 98% of world wide gas production and consumption. It is an equilibrium model that includes game-theoretic elements by allowing for Nash-Cournot market power of individual producers (via their dedicated trading arms) as well as for collusion among groups of natural gas suppliers.
For each market covered, three seasons are modeled (low, peak, high demand) with the market participants including producers and their marketing and trading arms (traders), pipeline operators2 and storage operators, LNG liquefiers, regasifiers, tankers (implicitly), marketers (implicitly), and consumers in three sectors (residential/commercial, industrial, and power generation) via their aggregate inverse demand functions. These players, except for LNG tankers, marketers and consumers, are modeled via convex optimization problems whose necessary and sufficient Karush-Kuhn-Tucker (KKT) optimality conditions when combined with market-clearing conditions comprise a market equilibrium formulation (Gabriel et al., 2005ab; Egging and Gabriel, 2006; Egging et al., 2008). The optimization problems of the players are typically profit maximization objectives subject to operational/engineering constraints, with all players except for the traders and the regasifiers being price-takers in the production, transportation, and storage markets. By contrast, the traders and regasifiers are allowed to behave strategically in multiple countries and can withhold gas to downstream customers to maximize their profits.
The producer sells gas directly to its dedicated pipeline trading arm (trader) as well as to the LNG liquefier. The trader then sells to the storage operator and the marketer, the latter being the interface with the three consumption sectors (residential/commercial, industrial, power generation). Each trader can be active in different countries, namely all those countries that he can reached by pipeline. The liquefier sells to a regasifier at an LNG import terminal. The regasifier in turn sells to the storage operator and the marketer. The storage operator, finally, sells to the marketer taking advantage of seasonal arbitrage by buying gas in the low demand season and selling it to the marketer in the high and peak seasons.
Modeling traders as separate participants increases model transparency by clearly splitting production and export activities. Examples of traders in this sense in today's natural gas marketplace include Gazexport for Gazprom (Russia) and GasTerra for NAM (Nederlandse Aardolie Maatschappij, Netherlands).
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