(later Ukraine)
Table 3-4 Overview of Players in the Model
The purpose of an initial, simplified version of the model is to model the investments in gas pipelines to Turkey as a dynamic game so as to gain insights in the conditions that determine the time path and the choice of the investments in gas pipelines in the region. The simplified version of the model focuses only on Turkey, whereas a future version will consider extensions to alternative demand markets such as China, India, Japan, and Western Europe (This extended version might eventually explore a gigantic future "gas belt" from Ireland to Australia.) However, we might already allow in the simplified version that some of the gas piped through Turkey will be exported to Western and Eastern Europe.
Key Characteristics for our new Gas Trade Model:
• Non-cooperative game of two-stage investments with profit maximization over pipeline lifetimes (not one optimization over the whole time horizon as in MESSAGE)
• price-driven
• time horizon 1998-2050
• competition between long-term contracts and short-term market segments -> analyze gas market liberalization
• analyze first-mover advantage
• Later: key linkage between Asian and European gas markets
4. Gas Supply
Fig. 4-1 is an excerpt from the USGS "Gas Futures" map (see [Masters, Turner, 1998]) which illustrates the geographical location of gas fields in the Caspian Sea Region. The color code indicates the potential size of the gas amounts. Note the gigantic amounts in Russia and Iran (Iran holds 15% of the world’s gas reserves (http://www.eia.doe.gov/emeu/cabs/caspfull.html)) which are depicted with the color red. Amounts in Turkmenistan and Kazakhstan are at least an order of magnitude smaller (blue color). They are of similar magnitude as North Sea Gas Reserves.
Fig. 4-1. "Gas Futures" map. Potential amounts and locations of gas fields are indicated with different colors. Purple: <0.6, Yellow: from 0.6 to 6, Brown: from 6 to 60, Orange: from 60 to 120, Blue: from 120 to 600, Red: > 600 tcf. Source: U.S. Geological Survey (USGS), see [Masters, Turner, 1998].
Many energy-systems models (e.g., MESSAGE) use cumulative gas supply cost curves. These curves specify the expected cost of gas extraction once a certain cumulative amount of gas has been extracted. In our study we follow (just as in MESSAGE) the classification method of [Rogner, 1997]. He distinguishes 8 different cost categories (see Table 4-1) for gas extraction
according to different economic and technical feasibility. Technological progress in gas extraction continuously transforms higher categories in lower ones.
Production cost estimates in
Categor Natural Natural Natural Coalbe Tight Gas Aquifer Additiona
Source reserve EGR undisc. methan gas hydrate gas occurrence
Bourrelier et al. 4 - 30 > 30 > 30 > 30 > 30
Dahl and Gjelsvik 1993 2 - 15 EEM Consult 1995 7,5 - 14
Attanasi 1995 6 - 30
Davidson > 10
Rogner 1997 < 10 - 25 - 29 16 - 25 29 - 42 29 - 42 d/ d/ 42 - 145
Attanasi & Schmoker > 11 > 11
Collet and Kuuskraa > 25
Category I II III IV V VI VII
Selected range (1998 2 - 16 25 - 29 4 - 30 10 - 42 11 - 42 25 - 145 30 - 145
a/ includes Algeria, FSU and Western Europe (Netherlands, U.K. and b/ includes Algeria, Iran, Nigeria, Russia and
c/ includes undiscovered resources in onshore and offshore areas of the
d/ gas hydrates and aquifer gas is included in additional occurrences with a cost range of 42 -e/ quoted in BGR
Table 4-1 Assumed extraction cost ranges for the 8 categories suggested by Rogner. Note that these categories are identical to the current implementation in the MESSAGE model and that overlap in extraction costs are enormous.
In the next step we assume probability distributions for each of the cost categories. For our purpose we use the same regional distributions as assumed in the forthcoming World Energy Assessment report (WEA, 2000). Doing this for natural gas categories I-VI yields cumulative gas supply functions, see Fig. 4-2.
Gas Supply Curves (Cat. I-VI)
0 20 40 60
0 20 40 60 80 100 120 140
Cumulative supply [Gtoe]
Extraction costs [US$/boe]
Russia Iran
Central Asian Producers (CAP) Libya/Tunisia/
Algeria/Egypt
Fig. 4-2. Cumulative gas supply cost curves (Natural Gas Cat. I-VI, based on Rogner method and regional data, adapted by Roehrl).
Finally, note that as specified in the accompanying Excel data file, domestic production in Turkey is assumed to be constant at a level of 0.2 Bcm per year (EIA, 2000).
5. Gas Demand
Fig. 5-1 shows natural gas use and production in the 1990s for the players of our Caspian gas game. The difference between production and use is the net exports. Note the strong dominance of Russia both in gas use and exports. Taking this into account and the much larger gas resource base in Russia than in Caspian region countries, it is clear that Central Asian countries will only play an intermediate (a few decades), strategic role (energy security etc.) in Eurasian gas markets. The gas market will clearly be dominated by Russia, and maybe Iran (provided isolation policies of the West are stopped).
0 200 400 600 800 1000
1992 1993 1994 1995 1996 1997 1998
Year
Natural Gas, use and production [bcm]
CAP
Russia Russia, net exports
Turkey
Algeria/
Egypt/
Libya Iran
Fig. 5-1. Natural gas use and production in the 1990s. The difference between production and use is the net exports.
For our purpose we assume that gas demand is a simple function of GDP and the price of gas:
y
g e
e Y t
t P t
D
( )
=α( ) ( )
where D(t) = demand, = constant, P = price of natural gas, Y = GDP, eg = price elasticity and ey is the income elasticity.Typical price elasticities are around –0.7 for industry in Western-Europe and aggregated over all sectors and markets in 6 countries around –0.93 (see [Golombek et al., 1995]). Brekke et al.
(1987) used a price elasticity of –0.7 and an income elasticity of 0.8 for the European continent.
It turns out that the respective elasticities for Turkey are quite different (based on 1990s data)5: eg =0.12 and ey =2.93.
In other words, gas demand is driven mainly by GDP increase and practically insensitive to price changes. That is not surprising for an emerging country with very weak infrastructure and rapidly increasing demand and industrial structure. And as in Asia6, the fastest growth of gas
5 Note that an average gas price for Turkey in 1998 was about 170 (1995)US$/1000 cm.
6 In Europe and Asia by far the fastest growth of gas use is expected in the power sector. For example, in Europe more than 50 percent of projected rise in demand for natural gas is due to power sector (see [Capros, 1998]).
use in Turkey is expected in the power sector (which scales perfectly with GDP for both developed and developing countries; see, e.g., [Roehrl, 2000]). Furthermore, the power sector provides the large demand points needed as an "anchor" for new gas infrastructures which are subject to strong scale economies. Also, the gas-combined-cycle technology has emerged as a very competitive ad flexible new option (due to learning by doing since the 60s). Note that Turkish growth in electricity use over the next 15 years is expected to reach at least 8% per year. Currently, 4.2 GW of gas-fired capacity is seeking investment (mainly according to the Turkish "Build-Operate-Transfer"-Model).
However, once a more mature gas market (often characterized by market shares for gas in primary energy of more than 20-25%) is developed, a more even diffusion of gas demand to other sectors is expected. Taking this and the most likely liberalization of energy markets into account, a convergence to elasticities as observed today in Western Europe is to be expected.
Demand for natural gas in Turkey is projected to quadruple within 20 years, and several independent estimates see Turkey’s annual consumption reaching as high as 1.4 Tcf by 2020.
Gas consumption in Turkey rose from 1.1 Bcm in 1988 to 9.9 Bcm (billion cubic meter) in 1998 (BPAmoco, 1999). In 1998, 6.8 Bcm were imported from Russia by pipeline. 3.0 Bcm was imported from Algeria in the form of LNG. Domestic production was around 0.2 Bcm in 1999 (EIA, 2000) or 2.8% of domestic consumption. Gas consumption is projected to increase to 25.2 bcm in 2010 and 165.2 bcm in 2020 (EIA, 2000).
GDP projections based on IPCC SRES B2
10 100 1,000 10,000
1995 2010 2025 2040
Year GDP at market exchange rates [billion (1995)US$]
Russia
Central Asian Producers (CAP) Iran
Algeria and Egypt
Turkey
Fig. 5-2. GDP projections for 1998 to 2050 for the "players" described above. The projections are based on the IPCC SRES marker scenario B2 (see [Riahi, Roehrl, 2000]).
Fig. 5-2 shows GDP projections for 1998 to 2050 for the "players" described above, based on the IPCC SRES marker scenario B2 (see [Riahi, Roehrl, 2000]). B2 is a "dynamics-as-usual"
scenario which probably follows a central case future (i.e., not an extreme case). Interestingly, although Iran and CAP countries will experience a considerable population increase in the next 50 years, total GDP of Russia will stay considerably above that of these countries over the whole time horizon. The same will most likely be true for gas demand.
6. Gas Pipelines
6.1. Overview
The central question here is, of course, how many natural gas pipelines will be needed to transport gas from Central Asia to the Turkish (and European) market?!
Exporters of gas currently have basically 2 options (EIA, 2000): Exporting through the Russian gas pipeline system was the only option available for Caspian gas until 1997. Although over 2 Tcf of Caspian Sea Region gas had been exported via this system in 1990, exports fell to 0.3 Tcf in 1997 because of disputes between Turkmenistan and the Russian gas company Gazprom, a competitor with Turkmenistan, which owned the pipelines. Turkmenistan and Gazprom have come to an agreement to allow Turkmenistan to resume gas exports to Ukraine in 1999.
Turkmenistan developed an alternative export route by building a new pipeline from Ekarem (Turkmenistan) to the Iranian border. Limited exports began in 1997, and the ultimate capacity of the pipeline will be 0.5 Tcf (see Section 0).
Neither of these pipeline options will allow gas from the Caspian Sea Region to compete for a share of the Turkish gas market. Demand for natural gas in Turkey is projected to quadruple within 20 years, and several independent estimates see Turkey’s annual consumption reaching as high as 1.4 Tcf by 2020. In addition, there are no export options available to supply gas to the Asian market, where energy demand is expected to grow more rapidly than in any other part of the world.
For natural gas exports to reach these new markets, and for exports to realize their annual potential of 3 Tcf by 2010 and over 5 Tcf within 20 years, several new pipelines will need to be built. Most of the proposals call for pipelines with a capacity of 1 Tcf each, so that 3 or more pipelines could be built, depending upon the extent to which the existing Russian system will be used to supply gas to European markets. Of the proposed new pipelines, the ones that are in the most advanced planning stages are the ones to bring gas to Turkey, such as the Trans-Caspian pipelines and Trans-Iranian lines that are competing to transport 1 Tcf annually to Turkey and European markets (see Section 0 for details).
6.2. Current natural gas trade volumes
Piped gas trade in Eurasia in 1998, in billion cubic meters [bcm]
From
DK D NL N UK Russia Turkmenistan Oman Algeria Total
imports To
Europe
Austria - 0.3 - 0.4 - 5.5 - - - 6.2
Belgium - 0.5 5.3 5.1 - - - - - 10.9
Bulgaria - - - - - 3.8 - - - 3.8
Croatia - - - - - 1.1 - - - 1.1
Czech Republic
- - - 0.8 - 8.6 - - - 9.4
Finland - - - - - 4.2 - - - 4.2
France - - 5.5 10.2 - 10.2 - - - 25.9
Germany 1.8 - 21.1 17.5 0.9 32.3 - - - 73.6
Greece - - - - - 0.9 - - - 0.9
Hungary - 1.0 - - - 8.5 - - - 9.5
Ireland - - - - 0.9 - - - - 0.9
Italy - - 3.0 - - 16.7 - - 20.9 40.6
Luxembourg - - 0.8 - - - - - - 0.8
Netherlands - - - 5.2 0.6 - - - - 5.8
Poland - - - - - 7.5 - - - 7.5
Portugal - - - - - - - - 0.9 0.9
Romania - - - - - 3.8 - - - 3.8
Slovakia - - - - - 6.9 - - - 6.9
Slovenia - - - - - 0.5 - - 0.4 0.9
Spain - - - 2.5 - - - - 4.5 7.0
Sweden 0.9 - - - - - - - - 0.9
Switzerland - 1.5 0.7 - - 0.5 - - - 2.7
Turkey - - - - - 6.8 - - - 6.8
UK - - - 0.9 - - - - 0.9
Others - - - - - 2.5 - - - 2.5
Middle East
Iran - - - - - - 1.8 - - 1.8
United Arab Emirates
- - - - - - - 0.5 - 0.5
Africa
Tunisia - - - - - - - - 0.8 0.8
TOTAL EXPORTS
2.7 3.3 36.4 42.6 2.4 120.3 1.8 0.5 27.5 237.3
Table 6-1 Natural Gas Trade through pipelines in Eurasia in 1998. Data source: CEDIGAZ.
World LNG Trade in 1998, in billion cubic meters [bcm]
From
USA Qatar UAE Algeria Libya Australia Brunei Indonesia Malaysia Total
imports To
North America
USA - - 0.1 2.0 - 0.2 - - - 2.3
Europe
Belgium - - - 4.3 - - - - - 4.3
France - - - 9.8 - - - - - 9.8
Italy - - 0.1 1.9 - - - - - 2.0
Spain - 0.5 0.6 3.9 0.9 - - - - 5.9
Turkey - 0.6 - 3.0 - - - - - 3.6
Asia Pacific
Japan 1.8 3.7 6.2 - - 9.7 7.3 24.2 13.2 66.1
South Korea - - 0.1 - - - 0.8 9.5 3.9 14.3
Taiwan - - - - - - - 2.4 2.3 4.7
TOTAL EXPORTS
1.8 4.8 7.1 24.9 0.9 9.9 8.1 36.1 19.4 113.0
Table 6-2 World LNG Trade in 1998, in billion cubic meters. Source: CEDIGAZ.
6.3. Existing and Planned Pipeline Project
Supply to Turkey can come from the Russian Federation, Iran, Turkmenistan (and Kazakhstan, Azerbaijan), as well as Egypt and Algeria. This Section provides a brief overview of the major proposed pipeline projects, see Fig. 6-1.