Gas Transit, Geopolitics and Emergence of Games with Application to CIS Countries

Abstract

Gas is an interesting example in which the market structure cannot be derived from pure economic aspects. Due to huge required investments, substantial transport costs and large heterogeneity in gas deposits and major consumption areas geography is very important. Politics also plays an important role as a restriction to the development of otherwise optimal investment projects. As a consequence, land locked countries (like Central Asian) have very few choices of transport routes, and geopolitics more than economics governs the choice of pipelines including projects. The Baker Institute World Gas Trade Model makes an attempt to forecast future development of gas markets till 2040 and reveals the crucial role of both geography and political constraints on future development. Therefore, any analysis of the gas market must include economic theory, geography and geopolitics. The phenomenon of gas transit has geopolitical origin and may lead to games. If transit country cannot become a member of any geopolitical coalitions (this is rarely possible), then it brings little externality to the relations between producer and consumer, who have to use its territory to have market link. The temporal evolution of transit game can also differ. For example, gas games between Russia and Ukraine can vanish over time given the technical possibility of gas pipeline transit via the bottom of Baltic and Black Seas. Such opportunity is less favourable for Turkmenistan, as it cannot have sea access and cannot influence security level in Afghanistan.

Keywords: Natural Gas, Geopolitics, Transit, Games, Case Studies