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Transporting Russian Gas to Western Europe — A Simulation Analysis

This paper examines the options of transporting Russian gas to Western Europe, an issue that has thus far been dominated by a single transit country, Ukraine, which has recently witnessed substantial political turmoil. The completion of a new transit corridor through Belarus in 1999, the so-called Yamal-Europe pipeline, has modified the situation profoundly. The paper develops a model of different strategies of Russia and Ukraine, and derives the analytical solution for Russian gas exports to Western Europe, prices, and the expected profits for the players; we also calibrate numerical results and perform simulations. It turns out that Ukraine suffers a loss from the market entry of Belarus, RussiaÕs profits significantly increase, and Russia has an incentive to expand its gas transit capacity through Belarus further. The gas price for West European importers falls in the case of cooperative behavior of Russia and Ukraine, and/or new pipeline construction through Belarus. However, both developments would also imply a higher European import dependence on Russian gas.

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Energy Specializations: Natural Gas – Pipelines ; Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q48: Energy: Government Policy, Q35: Hydrocarbon Resources, L95: Gas Utilities; Pipelines; Water Utilities

Keywords: Natural gas, Russia, Western Europe, pipeline gas trade, gas transportation

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No2-3

Published in Volume 26, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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