Russo-Ukrainian Strategic Gas Bargaining

Transcription

1 Russo-Ukrainian Strategic Gas Bargaining Chi Kong Chyong EPRG, University of Cambridge EPRG E&E Seminar - 24 May 2010

2 Outline 1. Motivation and research questions 2. Main messages 3. Overview Gazprom s bypass pipelines Ukraine s gas sector 4. A simple Nash Bargaining model combined with Oligopolistic gas market simulation model 5. Preliminary results 6. Conclusions 2

3 US$/tc cm Russo-Ukrainian Gas Relations Gas Crisis Gazprom s Barter deals: quest gas for Europe s introduction 2009 exchange Gas response: Crisis of for European transit; price in UA Conflict (also March in other 2009 over price CIS EU-Ukraine countries); for 2009; Joint UA s Declaration debt to on Annual Gazprom; Modernisation Intergovernmental of Ukraine s agreements Gas Transit instead System of (a UA: commercial increase high profile in contracts. import but not price credible = increase agreement); in transit price for Gazprom; Results: Theft initial of cut-off gas in for Ukrainian UA, again storage; UA off-took EU Increase gas ~3 in weeks political of support total cut-off for Nord for UA Stream and EU; and Results: South 3 days Stream; of cut-off supplies to UA, but UA offtook gas 2 long-term intended contracts for EU; (10 years) regulating transit through and supplies to UA ( European price Commercial formula contracts for transit for and 5 supplies); years (price was set for 6 months period only) European netback price Ukrainian import price

4 Recent Developments in Russo-Ukrainian gas relations Apr 22, 2010: Russia and Ukraine signed a deal on Gas Price and Lease of Sevastopol Naval Base; RF Naval Fleet in Crimea until 2042; 30% (or 100$/tcm if price>333$/tcm) discount on gas price until 2019; Apr 30, 2010: V. Putin Proposed to merge Gazprom and Naftogaz of Ukraine Gazprom s shares fell 2.6% on news of the offer May 13, 2010: CEO s of Gazprom and Ukrainian Energy Minister discussed the merger deal in more detail a merger of the two companies will be an important element in raising Europe's energy security alongside diversification of routes for delivering Russia gas to Europe. In that regard, our plans to build South Stream remain unchanged. We plan to add significant gas transportation capacity by December 31, 2015 to deliver Russian gas on a new export corridor (Gazprom s CEO, A. Miller) 4

5 Research questions What is the nature of gas bargaining between Ukraine and Russia? Does South Stream improve Gazprom s bargaining power vis-a- vis Ukraine? 5

6 Messages Under certain assumptions on costs, South Stream appears to be a credible threat that improves Russia s bargaining power... However, both Russia s bargaining position and security of gas transit to Europe could be improved by reforming Ukraine s gas sector and at least by unbundling Ukrainian transit business... The potentials of Ukrainian gas sector should not be underestimated... 6

7 Outline 1. Motivation and research questions 2. Main messages 3. Overview Gazprom s bypass pipelines Ukraine s gas sector 4. A simple Nash Bargaining model combined with Oligopolistic gas market simulation model 5. Preliminary results 6. Conclusions 7

8 Russian natural gas facts 2007 Gas Reserves EU-Russia gas trade Dependency on Ukrainian transit 48 TCM Gas reserves, as % of world 26% Gas Production 650 bcm Gas Production, as % of world 22% Gas Exports Gas Exports to Europe, incl. Turkey 268 bcm 168 bcm 2007 Russian gas accounts for 25% of European gas consumption; 90 bcm 30 bcm 120 bcm Gas exports to Europe accounts for 4% of Russian GDP; 71% of Russian Gas exports is transported through Ukraine 8

9 Gazprom s Bypass Pipelines 55 bcm ~ bcm 63 bcm 9

10 South Stream route Source: Gazprom Off-shore (Black Sea) Part: Gazprom/ENI Partnership (50/50); Total Capacity: 63 bcm/a Length: ~900 km Onshore Parts: Bulgaria: ~960 km Greece: ~690 km Serbia: ~530 km Hungary: ~610 km Slovenia: ~220 km Costs: RF Ministry of Energy: ~ US$20 bn (2008); But Gazprom insisted <US$20 bn (2008); Eni's CEO Paolo Scaroni (2007): US$15.73 bn Media reports ~ US$10-30 bn; 10

11 Outline 1. Motivation and research questions 2. Main messages 3. Overview Gazprom s bypass pipelines Ukraine s gas sector 4. A simple Nash Bargaining model combined with Oligopolistic gas market simulation model 5. Preliminary results 6. Conclusions 11

12 Ukraine s Gas Sector Primary Energy Consumption: % % 12% Oil Natural Gas Coal Production 30% 30% 41% Nuclear Energy Hydro electric Imports 70% Source: BP Stat Review 2009 Source: BP Stat Review 2009 bcm Gas Consumption Technical Use Industry Household incl. District Heating European price netback to Ukraine, $/tcm Industry, $/tcm Weighted-Average Import Price, $/tcm Household $/tcm Source: Ukrainian Ministry of Energy Source: Ukrainian Ministry of Energy 12

13 Ukrainian Market in Gazprom s Sales Portfolio Gazprom's Sales in 2009 Macedonia Bosnia and Switzerland Slovenia Croatia Serbia Greece Bulgaria Romania Belgium Finland The Netherlands Austria Slovakia Czech Republic Hungary Poland United Kingdom France Italy Turkey Ukraine Germany $ mln 40% 35% 30% 25% 20% 15% 10% 5% 0% Value of Ukrainian Gas Market: Border Price European Netback Price Actual Price % of Gazprom s European Market Value of Ukrainian Gas Market: Domestic Prices Source: Gazprom; Ukrainian Ministry of Energy, Naftogaz Technical Use, $ mln Household, District Heating, Municipalities etc, $ mln Power Industry, $ mln Industry (excl power), $ mln

14 Outline 1. Motivation and research questions 2. Main messages 3. Overview Gazprom s bypass solution Ukraine s gas sector 4. A simple Nash Bargaining model combined with Oligopolistic gas market simulation model 5. Preliminary results 6. Conclusions 14

15 Model Structure Build South Stream Bargaining Game pπ** D +(1-p)Π** A Disagreement: Disruption through UA (p) Agreement: No Disruption through UA (1-p) Oligopolistic European gas market simulation Oligopolistic European gas market simulation Π** D Π** A Gazprom Don t Build South Stream Bargaining Game pπ* D +(1-p)Π* A Disagreement: Disruption through UA (p) Agreement: No Disruption through UA (1-p) Oligopolistic European gas market simulation Oligopolistic European gas market simulation Π* D Π* A FOR THIS PRESENTATION WE ARE NOT ANALYZING DISAGREEMENT OUTCOMES, I.E. P=0 (BUT CERTAINLY WILL) 15

16 Nash Bargaining Model Suppose that gains (measured in common currency, US$) relative to the disagreement outcome total Π and that Gazprom receives a share x ru then: (1) (2) where and q * eu and q * ua are equilibrium quantities (obtained from oligopolistic market simulation model) to Europe and Ukraine respectively; p * eu is equilibrium price in Europe; P ua is Ukraine s domestic gas price (regulated); C ru =c ru =const is Gazprom s lrmc of production and c ua is Ukraine s short-run avoidable cost The solution is or where α Gazprom s bargaining power 16

17 Does South Stream improve Gazprom s bargaining power? Suppose 1 : Gazprom finalized feasibility studies and decides to construct South Stream, SS, with capital cost of C ss which will be operational by 2016; Then s and p * ss are equilibrium quantities and prices of gas through South Stream (obtained from gas market simulation model); q ** eu, p ** eu and q * eu, p * eu are equilibrium quantities and prices through Ukrainian route when SS is built and when SS is not built respectively. Then, total rent accrued to Gazprom when SS is in operation is (5) where thus, investment in South Stream is justifiable from bargaining perspective when: (6) or (7) where α Gazprom s current share in total rent and 17 1 This section is based on ideas presented in the unpublished paper of D. Newbery (1994)

18 Oligopolistic Model of Eurasian Gas Markets Model Description LNG EXPORTERS: -Algeria; -Egypt; -Libya; -Qatar; -Oman; -Nigeria; -Trinidad&Tobago; -Norway; -Russia (Shtokman); - Regasification Terminals Strategic Eurasian Natural Gas Model EPRG-egas Two-Stage, static equilibrium model of successive oligopolies; Producers are clever and know how traders will behave; Assumptions for reference case up to 2040: Price forecast based on IEA s Oil Price forecast; Forecast of demand, production and liquefaction based on IEA s WEO2009; Future LNG regasification in Europe was accounted for; Costs assumptions: OME2001,2004; IEA2003,

19 Assumptions on South Stream 3 parallel lines under Black Sea; One line goes through Greece to Italy (cap 20 bcm/a) Two other lines with total of 43 bcm go through Serbia and further to Austria and Italy through Slovenia and Hungary; Capital cost (incl. financial): ~$24 bn Consistent with most publically available estimates; Financial Assumptions: Off-shore part will have financial conditions similar to those of Nord Stream construction; Onshore part will be financed by JVs between Gazprom and national energy companies; 19

20 Outline 1. Motivation and research questions 2. Main messages 3. Overview Gazprom s bypass solution Ukraine s gas sector 4. A simple Nash Bargaining model 5. Preliminary results 6. Conclusions 20

21 Preliminary Results (1) Does South Stream improve Gazprom s bargaining power? Rents on different routes US$ mln R* R** Vss Assuming a discount rate, DR, of 10% this gives β=1 and with a DR of 5% this gives β=0.99; How α has been computed? Using eq.3 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% β=1 ALPHA (actual prices) ALPHA (under netback) In 2009 α=0.91 thus, SS improves Gazprom s ability to extract rent from Ukraine. 21 Own calculations based on Gazprom; Ukrainian Ministry of Energy, Naftogaz

22 Preliminary Results (2) South Stream Break-even point Assuming that our assumptions on capital cost are questionable, then what should be C * ss that make Gazprom indifferent between having SS and not having it? Using eq. 6 this gives: C * ss=v ss -α(r*-r**) So, under high gas prices in Europe and subsidized sales to Ukraine, what was the threshold for Gazprom to invest in SS during ? α (under C * ss netback) 10% DR 5% DR * $43.42 bn $67.34 bn $71.14 bn $ bn $70.18 bn $114.1 bn $81.66 bn $134.3 bn *based on actual prices 22

23 Preliminary Results (3) Can Ukraine convince Gazprom not to bypass it? Assuming that Gazprom and Ukraine are fully aware of SS strategic implications, is there any policy option available to Ukraine such that Gazprom would be indifferent between investing in SS and agreeing on Ukraine s new proposal? Yes: Gazprom is indifferent between (8) Where U ** is rent from gas sales in Ukraine under new policy (e.g. Increase in domestic prices); Then, Ukraine has to increase the value of its domestic market by: (9) where In 2010 Gazprom and Ukrainian Energy Ministry agreed to supply 36.5 bcm to Ukraine. Suppose that this year domestic prices in Ukraine is at 2009 level then according (9), average domestic price in Ukraine should be increased by 44%. Other options: decrease in transit price or give Gazprom higher market share in Ukraine (after 2009 crisis NERC of Ukraine granted Gazprom a license to supply 25% of industrial market); However, current domestic politics in Ukraine might not favor policy option concerning increase in price and/or giving Gazprom higher market share; 23

24 Political cost of gas imports in Ukraine What Should Ukrainian Government do about Increase in Price of Russian Gas? 45% 40% 35% 30% 40% Make Political and Economic Concessions in exchange for favourable import price Implementation of energy efficiency measures asap and use of other energy resources Effective allocation of indigenous gas production and mandate that gas for population consumption 25% 21% Shift to use of electricity for household consumption (heating etc) 20% Increase subsidies for population to pay gas bills 15% 10% 5% 0% 10% 12% 6% 1% 2% 9% Increase final gas prices in proportion to an increase in russian import price others Difficult to answer Survey in 2006 Source: razumkov.org.ua 24

25 Conclusions South Stream is a credible option that increases Gazprom s bargaining power; If Ukraine wants to preserve its transit business it should: Dramatically reforms its gas sector by substantially increasing prices (especially for households and district heating); Transferring the operation of its transmission system to a consortium of investors independent from Naftogaz of Ukraine; increase in gas prices in Europe has transformed Ukraine in one of the most valuable market for Gazprom. 25

26 Next steps We will: 1. Consider disagreements resulting in disruptions of gas transit through Ukraine; 2. Include into analysis the Nord Stream and Yamal-Europe pipes as this would alter Gazprom s disagreement point when disruptions occur; 3. Include possible Ukraine s gas reform policies as these would also alter Ukraine s disagreement point: Increase in domestic prices induce efficiency and lowers gas consumption; Unbundle transit business from supplying one; 26

27 Thank You! 27