Investment Options and Bargaining Power the Eurasian Supply Chain for Natural Gas

Abstract

We use cooperative game theory to analyze how the architecture of the pipeline network determines the power structure in the supply chain for Russian gas. If the assessment is narrowly focused on the abilities to obstruct flows in the existing system, the main transit countries, Belarus and Ukraine, appear to be strong. If investment options are accounted for, however, Russia achieves clear dominance. We show that options to bypass one of the transit countries are of little strategic importance compared to Russia's direct access to its customers through the Baltic Sea. Comparing the results of our calibrated model with empirical evidence obtained from transit and import agreements we find that the Shapley value explains the power of major transit countries better than the core and the nucleolus