How will the conflict between Russia and Ukraine impact the

European gas market? A game theoretical approach.

by
Diana Mihaela Stnculescu, MSc Student

Abstract
Large consumption of natural gas, accompanied by decreasing domestic
production makes Europe heavily dependent on imports. Given the current
situation between Russia and Ukraine, the supply route that transits the
latter is considered a dangerously unstable one. In this paper I analyze
bargaining power of four important players and the impact of the potential
cut off between Russia and Ukraine. I address the gas supply and demand as
if the transit through Ukraine has been stopped and new solutions have to be
found. I establish the bargaining power of the major players using
cooperative game, by computing a form of the Shapley Value. Moreover,
given the network structure of the gas pipelines I apply a Network Game
Model, where pipeline networks are modeled as graphs. The empirical results
show that Germany is an important player on this market and that the
bargaining powers of Ukraine and Russia are similar, which might be the
cause of the existing conflict. Based on the findings I drew the conclusion
that Norway would be a good alternative for gas supply towards Ukraine and
also that Norway has the potential to increase its power by developing a
larger pipeline network with the rest of Europe.
JEL Classifications: C71, C78, Q31, Q37
Keywords: Gas Market, Game Theory, Shapely Value