1 Future of Global Energy Infrastructures: Yaroslav Minullin, Oleg Nikonov, Ivan Matrosov International Energy Workshop 2004 June 22, 2004 IEA, Paris,

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Future of Global Energy Infrastructures:

Yaroslav MinullinYaroslav Minullin, Oleg Nikonov, Ivan Matrosov, Oleg Nikonov, Ivan Matrosov

International Energy Workshop 2004International Energy Workshop 2004

June 22, 2004June 22, 2004

IEA, Paris, FranceIEA, Paris, France

Model Results of China's Natural Gas Market DevelopmentModel Results of China's Natural Gas Market Development

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Contents

Modeling investments decisionsModeling investments decisions Model applicationModel application Future developmentFuture development

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DYN/ECS-IIASA Energy Group (2000-2004)

ParticipantsParticipants IIASA (Laxenbrug, Austria)IIASA (Laxenbrug, Austria) Moscow State University (Moscow, Russia)Moscow State University (Moscow, Russia) Energy Systems Institute (Irkutsk, Russia)Energy Systems Institute (Irkutsk, Russia) Energy Research Institute (Moscow, Russia) Energy Research Institute (Moscow, Russia) newnew Urals State Technical University (Ekaterinburg, Russia) Urals State Technical University (Ekaterinburg, Russia) The main resultsThe main results 2000 – 2002 IGOR and G-TIME model, results for Turkey’s gas 2000 – 2002 IGOR and G-TIME model, results for Turkey’s gas

market, generalized Nash equilibrium solutionsmarket, generalized Nash equilibrium solutions 2002 – G-TIME China with new local-equilibrium price 2002 – G-TIME China with new local-equilibrium price

formation mechanism formation mechanism 2003 – Modified theoretical version of the game of timing, a 2003 – Modified theoretical version of the game of timing, a

new version of software new version of software 2004 – Preliminary results on: expansion of the game to 82004 – Preliminary results on: expansion of the game to 8 players, introduction of 2-markets game and LNG as a players, introduction of 2-markets game and LNG as a

playerplayer

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Russia’s External Trade

48.3%

29.4%

18.2%

2.0%

0.5% 1.6%

OilNatural GasOil ProductsCoalElectricityOther Goods

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General formulation of the problem

The goal of investors: to maximize the future The goal of investors: to maximize the future profitprofit

The main variables on which the future profit The main variables on which the future profit depends are:depends are:

the price of gas and costs (fixed, for extraction the price of gas and costs (fixed, for extraction and transportation)and transportation)

While the expenses could be estimated, the While the expenses could be estimated, the price (under market conditions) depends on the price (under market conditions) depends on the gas demand and volume of gas delivered to the gas demand and volume of gas delivered to the marketmarket

The last, in turn, depends on the number of The last, in turn, depends on the number of participants who operate in the marketparticipants who operate in the market

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General formulation of the problem

Thus, there is a game situation where Thus, there is a game situation where the key parameters are times, when the key parameters are times, when the participants enter the market.the participants enter the market.

This concept has been formalized in This concept has been formalized in the models oriented to Turkey’s the models oriented to Turkey’s market and, in principal, to other market and, in principal, to other countries-consumers with the countries-consumers with the market economy.market economy.

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Modeling Framework

Assessments of the market and Assessments of the market and projectsprojects

Regulation of future supply and Regulation of future supply and optimization of current investments optimization of current investments (instantaneous supply game)(instantaneous supply game)

Selection of investment and Selection of investment and operation scenarios (game of timing)operation scenarios (game of timing)

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Modeling Framework

N-person game:N-person game: NN participants (players), participants (players), i = 1, … , N; xi = 1, … , N; xii - -

control variablescontrol variables Each participant has his own payoff function Each participant has his own payoff function ffii(x(x11, x, x22,…,x,…,xNN)), which is to be maximized, which is to be maximized

by choosing by choosing xxii The N-tuple The N-tuple (x(x11

* * xx22**,…,x,…,xNN

**)) is called Nash is called Nash equilibrium, if for every equilibrium, if for every ii the following equality the following equality is trueis true

ffii(x(x11**,…,x,…,xii*,…,x*,…,xNN

**) = max f) = max fii(x(x11**,…, x,…, xii,…,x,…,xNN

**)),, where maximum is taken over all admissible where maximum is taken over all admissible xxii

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Export Routes of Russian Gas

Source: Energy Research Institute of RAS, 2002Source: Energy Research Institute of RAS, 2002

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China’s Gas Market

Source: Energy Systems Institute of RAS, 2002Source: Energy Systems Institute of RAS, 2002

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China’s Energy SectorSpecific Features

Some features of a Planned Some features of a Planned EconomyEconomy

Lack of econometric dataLack of econometric data Low correlation between GDP and Low correlation between GDP and

sector’s incomessector’s incomes

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Price Formation

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Gas Market Model

Deposit 1Deposit 1 Project 1Project 1

ExtractionExtraction

TransportationTransportation

Deposit 2Deposit 2Project 2Project 2

ExtractionExtraction

TransportationTransportation

Natural-gas marketNatural-gas market

SupplySupply

PricePrice

p=p(dp=p(d00,p,p00,e,epp,y),y)

LiquidLiquidNaturalNatural

Gas (LNG)Gas (LNG)PricePrice

ForecastedForecasteddemanddemand

ForecastedForecastedpriceprice

ForecastedForecastedprice elasticityprice elasticity

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Supply Game One supplier

ymin Mi d0

Maximum payoff

yi

i

i max t - fixed

At each instant of time the player maximizes payoff:At each instant of time the player maximizes payoff:

ii(y,y(y,yii) ) max max yyiiDD

and gets an optimal value for supplyand gets an optimal value for supply

D

ii(y,y(y,yii)= [p(d)= [p(d00,p,p00,e,epp,y)-c(y,y)-c(yii)]y)]yii

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M1

M2

y1

y2

ymin

d0

Best response y2 (y1)

Best response y1 (y2)

Nash equilibrium point (y1 (y2) ; y2 (y1))

Supply Game Two suppliers

D

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Supply Game evolving over time

t

yi

Mi

yi2(t)

yi1(t)

d0(t)

ymin(t)

Each player gets an optimal supply plan in time:Each player gets an optimal supply plan in time:

yyi1i1(t) and y(t) and yi2i2(t)(t)

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Supply Game Benefits

Substituting optimal supply the player gets:Substituting optimal supply the player gets: upper benefit rate, bupper benefit rate, bi1i1(t) =(t) = ii(t,y(t),y(t,y(t),yi1i1(t))(t))

and lower benefit rate, band lower benefit rate, bi2i2(t) =(t) = ii(t,y(t),y(t,y(t),yi2i2(t))(t))

t, t-i

bi1(t)bi2(t)

t-i

Bi(t,t-i)

Upper benefit rate, bi1(t)

Lower benefit rate, bi2(t)

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ti0

ti

Return of investments

tiROI

Pi(t)

t, ti

Game of Timing

tt11ROI ROI (t(t11

00 ,, tt22

00) – t) – t00 min min tt11

00

……

tt22ROI ROI (t(t22

00 ,, tt11

00) –t) –t00 min min

ttii00

Nash equilibrium point of starting construction times :Nash equilibrium point of starting construction times :

(t(t**11

00 ; t; t**

2200; …; t; …; t**

ii00))

Start of operation

Start of making investments

Ci

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ProjectsPlayePlaye

rrProjectProject Length, Length,

kmkm Expected Expected starting starting

yearyear

Maximal Maximal capacitycapacity

, , bcm/yebcm/ye

arar

IInvestnvest--ments, ments,

bln bln USUSDD

Variable Variable costs,costs,

(extr. + tr.)(extr. + tr.)

USUSDD/100/10000mm33

11 IrkutskIrkutsk 27952795 20082008 2020 6.56.5 111111

22 SakhalinSakhalin 18001800 20152015 12.512.5 3.53.5 100.9100.9

33 SakhaSakha 42004200 20182018 17.517.5 8.88.8 166.83166.83

44 AltaiAltai 12001200 20072007 1010 2.12.1 87.487.4

55West West

SiberiaSiberia 61006100 20202020 3030 1515 176.4176.4

66TurkmenistTurkmenist

anan 62006200 20162016 2525 1313 167.6167.6

77 KazakhstanKazakhstan 51005100 20162016 2525 1212 160.05160.05

88 South-NorthSouth-North 15001500 20072007 2525 -- 2020

88 LNGLNG -- -- 6-426-42 -- world priceworld price

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New Assumptions

China as a consumer is considered to be China as a consumer is considered to be a system of 2 gas markets: NE and SE. a system of 2 gas markets: NE and SE. Each market is characterized by price, Each market is characterized by price, demand and elasticity forecastsdemand and elasticity forecasts

There is a South-North pipeline, There is a South-North pipeline, connecting both markets. It is assumed connecting both markets. It is assumed that gas can flow in both directions. It is that gas can flow in both directions. It is characterized by maximal capacity and characterized by maximal capacity and cost for transportationcost for transportation

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New Assumptions

In the NE region there is an LNG In the NE region there is an LNG terminal, which is characterized by terminal, which is characterized by maximal capacity and world LNG pricesmaximal capacity and world LNG prices

Some of the players are present on both Some of the players are present on both markets, but have one optimality markets, but have one optimality criterion (coalition)criterion (coalition)

Times of penetrating the market are Times of penetrating the market are fixed and determined by the earliest fixed and determined by the earliest technical possibility (no game of timing)technical possibility (no game of timing)

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Results of Simulations NE regionSupply curves

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Results of Simulations SE regionSupply curves

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Results of Simulations Supply on both markets

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Results of Simulations North-East pipeline

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Results of Simulations NE regionReturn on Investments

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Results of Simulations SE regionReturn on Investments

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Results of Simulations Prices

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Results of research direction

An information support for An information support for decision-makersdecision-makers and and energy market analystsenergy market analysts, which provides, which provides

A versatile economic evaluation of the A versatile economic evaluation of the selected project and the marketselected project and the market

Advices on the optimal timing, investment Advices on the optimal timing, investment flow, and supply regulationflow, and supply regulation

An assessment of impacts on the energy An assessment of impacts on the energy balances, the economy and the environment balances, the economy and the environment in importing as well as exporting countriesin importing as well as exporting countries

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Next Steps

Modify the model to be able to reflect Modify the model to be able to reflect risk, uncertainty, and datarisk, uncertainty, and data scarcityscarcity

To expand the game to 3 markets in To expand the game to 3 markets in ChinaChina

To introduce the governments of To introduce the governments of importing and exporting countries as importing and exporting countries as playersplayers

Globalization: Europe < -Globalization: Europe < - Russia -Russia - > Asia> Asia Integration with higher-level modelsIntegration with higher-level models

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Natural Gas Demand Forecast:NE region

0

20

40

60

80

100

120

140

160

2000 2005 2010 2015 2020 2025 2030

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Natural Gas Demand Forecast:SE region

0

20

40

60

80

100

2000 2005 2010 2015 2020 2025 2030

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Natural Gas Price and LNG Price Forecast: NE and SE

120

130

140

150

160

170

180

190

200

210

2000 2005 2010 2015 2020 2025 2030

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Gas Demand Price Elasticity Forecast: Base case

-0,8

-0,75

-0,7

-0,65

-0,6

-0,55

-0,52000 2005 2010 2015 2020 2025 2030