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Security of supply in the European Gas Market A model-based analysis

Ibrahim Abada and Olivier Massol

No 2010-13, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper introduces a general static Cournot-game model to study the Natural Gas market, taking into account disruption risks from suppliers. In order to most realistically describe the economical situation, our representation divides the market into two stages: the upstream market that links -by means of long-term contracts- local producers in exporting countries (Russia, Algeria, etc.) to foreign retailers who bring gas to the consuming countries to satisfy local demands in the downstream market. Thanks to short-run demand functions, we are able to introduce disruption costs to be paid to the consumers should disruption occur. First we mathematically develop our general model and write the associated KKT conditions, then we propose some case studies -under iso-elasticity assumptions- for the long-short-run inverse-demand curves in order to predict qualitatively and quantitatively the impacts of supply disruptions on Western European gas trade. In the second part, we study in detail the German gas market of the 80 to explain the supply choices of Germany, and we derive interesting conclusions and insights concerning the amounts and prices of Natural Gas brought to the market. The last part of the paper is dedicated to a study of the Bulgarian gas market, which is greatly dependent on the Russian gas supplies and hence very sensitive to interruption risks. Some thought-provoking conclusions are derived concerning the necessity to economically regulate the market, by means of gas amounts control, if the disruption probability is high enough.

Pages: 27 pages
Date: 2010
New Economics Papers: this item is included in nep-ene, nep-eur and nep-tra
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