1. 1 Future of Global Energy Infrastructures: Yaroslav Minullin, Oleg Nikonov, Ivan Matrosov International Energy Workshop 2004 June 22, 2004 IEA, Paris, France Model Results of China's Natural Gas Market Development

2. 2/30 Contents Modeling investments decisions Modeling investments decisions Model application Model application Future development Future development

3. 3/30 DYN/ECS-IIASA Energy Group (2000-2004) Participants 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) new Energy Research Institute (Moscow, Russia) new Urals State Technical University (Ekaterinburg, Russia) Urals State Technical University (Ekaterinburg, Russia) The main results 2000 – 2002 IGOR and G-TIME model, results for Turkey’s gas market, generalized Nash equilibrium solutions 2000 – 2002 IGOR and G-TIME model, results for Turkey’s gas market, generalized Nash equilibrium solutions 2002 – G-TIME China with new local-equilibrium price formation mechanism 2002 – G-TIME China with new local-equilibrium price formation mechanism 2003 – Modified theoretical version of the game of timing, a new version of software 2003 – Modified theoretical version of the game of timing, a new version of software 2004 – Preliminary results on: expansion of the game to 8 2004 – Preliminary results on: expansion of the game to 8 players, introduction of 2-markets game and LNG as a player players, introduction of 2-markets game and LNG as a player

4. 4/30 Russia’s External Trade

5. 5/30 General formulation of the problem The goal of investors: to maximize the future profit The goal of investors: to maximize the future profit The main variables on which the future profit depends are: The main variables on which the future profit depends are: the price of gas and costs (fixed, for extraction and transportation) the price of gas and costs (fixed, for extraction and transportation) While the expenses could be estimated, the price (under market conditions) depends on the gas demand and volume of gas delivered to the market While the expenses could be estimated, the price (under market conditions) depends on the gas demand and volume of gas delivered to the market The last, in turn, depends on the number of participants who operate in the market The last, in turn, depends on the number of participants who operate in the market

6. 6/30 General formulation of the problem Thus, there is a game situation where the key parameters are times, when the participants enter the market. This concept has been formalized in the models oriented to Turkey’s market and, in principal, to other countries- consumers with the market economy. This concept has been formalized in the models oriented to Turkey’s market and, in principal, to other countries- consumers with the market economy.

7. 7/30 Modeling Framework Assessments of the market and projects Assessments of the market and projects Regulation of future supply and optimization of current investments (instantaneous supply game) Regulation of future supply and optimization of current investments (instantaneous supply game) Selection of investment and operation scenarios (game of timing) Selection of investment and operation scenarios (game of timing)

8. 8/30 Modeling Framework N-person game: N participants (players), i = 1, …, N; x i - control variables N participants (players), i = 1, …, N; x i - control variables Each participant has his own payoff function Each participant has his own payoff function f i (x 1, x 2,…,x N ), which is to be maximized f i (x 1, x 2,…,x N ), which is to be maximized by choosing x i by choosing x i The N-tuple (x 1 * x 2 *,…,x N * ) is called Nash equilibrium, if for every i the following equality is true The N-tuple (x 1 * x 2 *,…,x N * ) is called Nash equilibrium, if for every i the following equality is true f i (x 1 *,…,x i *,…,x N * ) = max f i (x 1 *,…, x i,…,x N * ), f i (x 1 *,…,x i *,…,x N * ) = max f i (x 1 *,…, x i,…,x N * ), where maximum is taken over all admissible x i where maximum is taken over all admissible x i

9. 9/30 Export Routes of Russian Gas Source: Energy Research Institute of RAS, 2002

10. 10/30 China’s Gas Market Source: Energy Systems Institute of RAS, 2002

11. 11/30 China’s Energy Sector Specific Features Some features of a Planned Economy Some features of a Planned Economy Lack of econometric data Lack of econometric data Low correlation between GDP and sector’s incomes Low correlation between GDP and sector’s incomes

12. 12/30 Price Formation

13. 13/30 Gas Market Model Deposit 1 Project 1 Extraction Transportation Deposit 2 Project 2 Extraction Transportation Natural-gas market Supply Price p=p(d 0,p 0,e p,y) Liquid Natural Gas (LNG) Price Forecasteddemand Forecastedprice Forecasted price elasticity

14. 14/30 Supply Game One supplier y min MiMi d0d0 Maximum payoff yiyi ii  i max t - fixed At each instant of time the player maximizes payoff:  i (y,y i )  max  i (y,y i )  max y i  D y i  D and gets an optimal value for supply D  i (y,y i )= [p(d 0,p 0,e p,y)-c(y i )]y i

15. 15/30 M1M1 M2M2 y1y1 y2y2 y min d0d0 Best response y 2 (y 1 ) Best response y 1 (y 2 ) Nash equilibrium point (y 1 (y 2 ) ; y 2 (y 1 )) Supply Game Two suppliers D

16. 16/30 Supply Game evolving over time t yiyi MiMi y i2 (t) y i1 (t) d 0 (t) y min (t) Each player gets an optimal supply plan in time: y i1 (t) and y i2 (t)

17. 17/30 Supply Game Benefits Substituting optimal supply the player gets: upper benefit rate, b i1 (t) =  i (t,y(t),y i1 (t)) upper benefit rate, b i1 (t) =  i (t,y(t),y i1 (t)) and lower benefit rate, b i2 (t) =  i (t,y(t),y i2 (t)) t, t -i b i1 (t) b i2 (t) t -i B i (t,t -i ) Upper benefit rate, b i1 (t) Lower benefit rate, b i2 (t)

18. 18/30 ti0ti0 titi Return of investments t i ROI P i (t) t, t i Game of Timing t 1 ROI (t 1 0, t 2 0 ) – t 0  min t 1 0 t 1 0… t 2 ROI (t 2 0, t 1 0 ) –t 0  min t i 0 t i 0 Nash equilibrium point of starting construction times : (t * 1 0 ; t * 2 0 ; …; t * i 0 ) Start of operation Start of making investments CiCi

19. 19/30 Projects PlayerProject Length, km Expected starting year Maximal capacity, bcm/year Invest- ments, bln USD Variable costs, (extr. + tr.) USD/1000m 3 1Irkutsk27952008206.5111 2Sakhalin1800201512.53.5100.9 3Sakha4200201817.58.8166.83 4Altai12002007102.187.4 5 West Siberia 610020203015176.4 6Turkmenistan620020162513167.6 7Kazakhstan510020162512160.05 8South-North1500200725-20 8LNG--6-42- world price

20. 20/30 New Assumptions China as a consumer is considered to be a system of 2 gas markets: NE and SE. Each market is characterized by price, demand and elasticity forecasts China as a consumer is considered to be a system of 2 gas markets: NE and SE. Each market is characterized by price, demand and elasticity forecasts There is a South-North pipeline, connecting both markets. It is assumed that gas can flow in both directions. It is characterized by maximal capacity and cost for transportation There is a South-North pipeline, connecting both markets. It is assumed that gas can flow in both directions. It is characterized by maximal capacity and cost for transportation

21. 21/30 New Assumptions In the NE region there is an LNG terminal, which is characterized by maximal capacity and world LNG prices In the NE region there is an LNG terminal, which is characterized by maximal capacity and world LNG prices Some of the players are present on both markets, but have one optimality criterion (coalition) Some of the players are present on both markets, but have one optimality criterion (coalition) Times of penetrating the market are fixed and determined by the earliest technical possibility (no game of timing) Times of penetrating the market are fixed and determined by the earliest technical possibility (no game of timing)

22. 22/30 Results of Simulations NE region Supply curves

23. 23/30 Results of Simulations SE region Supply curves

24. 24/30 Results of Simulations Supply on both markets

25. 25/30 Results of Simulations North-East pipeline

26. 26/30 Results of Simulations NE region Return on Investments

27. 27/30 Results of Simulations SE region Return on Investments

28. 28/30 Results of Simulations Prices

29. 29/30 Results of research direction An information support for decision-makers and energy market analysts, which provides A versatile economic evaluation of the selected project and the market A versatile economic evaluation of the selected project and the market Advices on the optimal timing, investment flow, and supply regulation Advices on the optimal timing, investment flow, and supply regulation An assessment of impacts on the energy balances, the economy and the environment in importing as well as exporting countries An assessment of impacts on the energy balances, the economy and the environment in importing as well as exporting countries

30. 30/30 Next Steps Modify the model to be able to reflect risk, uncertainty, and data scarcity Modify the model to be able to reflect risk, uncertainty, and data scarcity To expand the game to 3 markets in China To expand the game to 3 markets in China To introduce the governments of importing and exporting countries as players To introduce the governments of importing and exporting countries as players Globalization: Europe Asia Globalization: Europe Asia Integration with higher-level models Integration with higher-level models

31. 31/30 Natural Gas Demand Forecast: NE region

32. 32/30 Natural Gas Demand Forecast: SE region

33. 33/30 Natural Gas Price and LNG Price Forecast: NE and SE

34. 34/30 Gas Demand Price Elasticity Forecast: Base case