Gas transportation, geopolitics and future market structure

Recent studies have shown the important role of geography, politics and technology for the evolution of markets for natural gas. Gas market differs from other markets due to high share of transport and infrastructure costs. Since investment is location specific, it involves also geopolitical aspects as a consequence. Future market structure becomes path dependent on the investment decisions, particularly in gas infrastructure (pipelines and LNG). Another important aspect that shapes future gas market is heterogeneity in reserve-production ratios across gas producing countries that will eventually lead to the emergence of narrow oligopoly formed by countries with the largest reserves: Russia, Iran and Qatar. The goal of this paper is to analyse a long run gas game. There exist several time scales, and by backward induction we arrive at the conclusion that some time during the 21st century (we name it long run) there will be an oligopoly consisting of only three major gas reserve holders: Russia (26%), Iran (15%) and Qatar (14%). They will face the demand from three major gas importers: EU, USA and Core Asia. While the development paths and market structures are highly uncertain in the middle run (when temporal competition with rivals having 3% or less of gas reserves is feasible), the cloud of uncertainty shrinks in the long run. But investment strategies of major players in the middle run will determine the topology of gas infrastructure in the long run. All the players have a vector of strategic choices where geography, politics and technology set their limitations. Putting it in a simple formal framework, we can say that players choose: intensity of exploitation and shares of investment in transport infrastructure (LNG and location-specific pipelines). Geographical analysis of gas fields of Russia shows that it has moderate flexibility, but still can control the future share of LNG and pipeline flows to Europe and Asia. Pipelines to EU are slightly preferred to pipelines to Asia but political aspects may play crucial role. Qatar is likely to invest only in LNG, but has the flexibility in the speed of its field exploitation (it may be lower that for Russia). Iran has the highest technological and geographical freedom in choices. Future market structures for gas can vary from oligopolistic to monopolistic–monopsonistic relationship, with possibly different prices.

► Not only economics but also geopolitics drives gas markets. ► Several time scales are introduced to grasp different factors influencing gas dynamics. ► The long run future of gas is analyzed using proven reserves and backward induction. ► Long run market will be dominated by gas supplies from Russia, Iran and Qatar. ► Future market structures can vary from narrow oligopoly to producer–consumer clusters.