Analysis of Bargaining Power between the EU and Russia by Altering Gas Supply Network Structure

Abstract

Global natural gas trade volume amounted to 1300 billion cubic meters (bcm) in 2021 and it is expected to increase regarding the growing concern for low-carbon emission fuel. However, natural gas requires special infrastructure in the transportation stage such as natural gas pipelines or Liquefied Natural Gas (LNG) plants and tankers. We use a Network Game theory where natural gas supply networks are treated as edges and adopt the Link-based Flexible Network Allocation Rule (LBFN) as a solution concept that can replace the Shapley Value. Our study reveals that Russia’s efforts to build diversionary routes effectively decrease the relative bargaining power of its traditional transit countries and increase its relative bargaining power. If there had been no Russian invasion of Ukraine in 2022, Nord Stream-2 would have come online as planned and Russia would have enjoyed high relative bargaining power as a dominant gas supplier. This is one of the underlying reasons why several European countries and the U.S. expressed strong opposition to the Nord Stream-2 project. However, if Russia cuts the gas supply to European countries as a result of recent events and the U.S. LNG penetrates into the European gas market, Russia will inevitably suffer from a huge decrease in its relative bargaining power.