1
Equilibrium in the Russia-India gas deal by Cournot strategic
interaction between gas players in India market
A thesis submitted in fulfillment of the requirements for the degree
of
BSc Economics and Business
at
the University of Amsterdam
by
Thanh Nguyen Kim1
Amsterdam, the Netherlands
2015
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2
Abstract
The new gas trade relationship of Russia with China and India alternatively secures Russia from
its East-West gas trade with Europe.This paper investigates the equilibrium of the upcoming
Russia-India gas trade deal through the lens of a Cournot game analysis, rather than the Stackelberg approach seen in related literature to date (Grais and Zheng, 1996). Specifically, it requires a unique relationship among imported natural gas prices: liquid natural gas (LNG), pipeline natural gas (PNG) from different project arrangements in the next 30-40 years, which is found by game theory. Furthermore, I apply Cournot interaction between LNG and PNG
projects to find the equation of the equilibrium gas price in the Russia-India deal, then use discounting method for the equilibrium value of the gas deal at present. Although the exogeneity assumption is a weak point, this paper provides an alternative framework for gas trade
interdependence analysis in equilibrium and consequently brings about interesting results. Imported gas prices are interlinked. Under assumptions, a single price emerges among the imported natural gas agents in equilibrium and the equilibrium is constantly stable, in vacuum of deviation actions.
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Table of Contents
Abstract ... 2
1. Introduction ... 5
1.1. Introducing the Russia-India deal and current situation: ... 5
1.1.1. Russia and its relevant ongoing gas deals: ... 5
1.1.2. India’s natural gas supply: ... 7
1.2. The importance of the Russia-India gas deal: ... 10
1.3. Research question:... 10
1.4. Reviews of previous literatures and discussion: ... 10
1.4.1. India’s natural gas demand: ... 10
1.4.2. An equilibrium analysis of a natural gas transnational pipeline system ... 12
1.5. Structure outline: ... 14
2. Methodology: ... 14
2.1. Assumptions: ... 14
2.2. Strategic pricing analysis: ... 16
2.2.1. Game 1: Price of TAPI and Price of R-I deal ... 16
2.2.2. Game 2: Average price of LNG and price of PNG: PLNG and PPNG ... 17
2.3. Discounting approach and deviation game analysis: ... 19
3. Discussion and Results: ... 19
3.1. Price link analysis via three scenarios: ... 19
3.1.1. Scenario A: ... 20
3.1.2. Scenario B: ... 25
3.1.3. Scenario C: ... 25
Comparison of three scenarios: ... 26
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Parameter sensitivity analysis: ... 28
3.3. Stability condition – deviation game analysis: ... 28
3.3.1. Russia – the supplier ... 29
3.3.2. China – the transmit country ... 30
4. Conclusion: ... 34
References ... 35
Appendices ... 38
Appendix 1: Dry natural gas production ... 38
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1. Introduction
1.1. Introducing the Russia-India deal and current situation: 1.1.1. Russia and its relevant ongoing gas deals:
Russia is a major player in the world oil and natural gas supply market, labeled as the world's third-largest producer of oil and in 2012, the second-largest producer of natural gas (U.S Energy Information Administration, n.d.-b). European countries receive 79% of Russia's crude oil exports and about 76% of its natural gas exports (U.S Energy Information Administration, n.d.-b). Also in the brief analysis of the U.S. Energy Information Administration about Russia, extensive networks of natural gas pipeline are concentrated in transit countries, explicitly Ukraine and Belarus, which retrospectively have undergone political disputes with Russia (Wikipedia, n.d.-a; Wikipedia, n.d.-b)
After recent conflicts worsening the gas business environment with European countries, Russia has been expanding its business partnership in Asia (Homeriki, 2014), where its
neighbors China and India (Jensen, 2004, p. 76)are craving energy. In May 2014, the Russia-China deal has been signed to supply for 30 years (RT Business, 2014) via the supply route Power of Siberia in the east, except for the western route Altai pipeline (see Illustration 1). Three months later, India showed its interest in Russian gas and blueprinted the Russia-India pipelined natural gas project (see Illustration 2) before their meeting in December 2014 at the India-Russia annual summit (Airy, 2014). It is highly feasible via the Altai pipeline in Russia connecting the Xinjiang province of China by Chinese territorial pipelines with the northern mainland of India (Brief, 2014). Although the negotiation outcome is classified, the likeliness of Altai pipeline construction is undeniably connected to the likeliness of the deal success in future.
6 Illustration 1: The two proposed pipelines for Russia-China deal. Both are officially confirmed (Source: Putin,
Xi Jinping sign mega gas deal on second gas supply route)
The discussion of the Altai pipeline has been postponed since 2013, possibly due to the 2013-2014 Ukrainian-Crimea crisis. However, the situation has relaxed somewhat in recent months. This is signaled in renewed interest by the relevant countries in recent energy contracts. Russia and Ukraine turn to short-term gas business partners for this winter at price $378 per 1,000 cubic meters and beginning of next year till March at $365 (BBC News, 2014), which later dropped to $350 (Interfax-Ukraine, 2014). Finally, on November 8-10 of 2014, the new Altai pipeline is recalled at the APEC summit in Beijing, whose contracted supply is at most 100 billion cubic meters of gas annually. Thereby Russia’s Gazprom and China National Petroleum Corporation agreeably will have signed the supply contract by the end of 2015 (Homeriki, 2014).The Russia-India deal is highly likely to eventuate and hence, needs analyzing.
7 Illustration 2: Connection between Russia-China and Russia-India deal in pipelines. (Source: Homeriki, 2014)
1.1.2. India’s natural gas supply:
It is good to spend some time discussing the Indian natural gas supply side before focusing on any specific gas pipeline deal. Besides the prospective Russia – India gas pipeline project, India relies on domestic production, contractual liquefied natural gas (LNG) and pipelined natural gas (PNG) which currently has none in function, but soon is operated by the Turkmenistan,
Afghanistan, Pakistan, India (TAPI) pipeline. - Domestic production:
Dry natural gas primarily is the most basic domestic resource for supply till 2004 in India. Statistical data of total production and consumption of dry natural gas are online on the
8 International Energy Statistics webpage of the U.S. Energy Information Administration and used as a proof for the claim above. India consumed dry natural gas the same amount they produced before the first import of natural gas is stocked and delivered in LNG form in 2004. Positive import of dry natural gas and LNG are documented since 2004 (International Energy Statistics). However, starting from 2010, the domestic dry gas production is observed to be declining at rate
d over time. Approximately, the rates between 2010/2011, 2011/2012, 2012/2013 were 0.09,
0.13, and 0.18 respectively (See Figure 1).
Figure 1: Total dry natural gas production from 2007-2013 in billion cubic meters (BCM). Conversion rate: 1 billion cubic feet = 35.31468 billion cubic meters (Source: International Energy Statistics). 𝑑𝑑(2010 2011⁄ ) = (49.25−54.13) 54.13 = −0.09; 𝑑𝑑(2011 2012⁄ ) = (42.74−49.25) 49.25 = −0.13; 𝑑𝑑(2012 2013⁄ ) = (34.85−42.74) 42.74 = −0.18 On another side, coal-bed methane (CBM) and shale gas are produced only domestically. The first exploration project has been launched in 2001 and the production of CBM started in 2010; however, foreign companies have been absent in production (India; U.S Energy Information Administration).
- LNG:
India started importing LNG in 2004 when its excess demand firstly displayed and (India; U.S Energy Information Administration). Over time, the quantity of both imported LNG and global LNG suppliers to India have grown to meet its escalating natural gas demand (India; U.S Energy Information Administration). 32,45 33,30 42,08 54,13 49,25 42,74 34,85 0 10 20 30 40 50 60 2007 2008 2009 2010 2011 2012 2013
9 Owing to new LNG supplies, Asian buyers have more bargaining power for lower prices (Lee, 2014, p. 5). Therefore, Lee (2014) states that the imported gas prices that India and China are having are competitive. The landed price of imported ING is quite low and fluctuated within a finite range (see Table 1).
Time 20132 Aug-143 Oct-144 Average 2014 (Brief, 2014)
Landed LNG price/mmBtu $10-$12 $11.2 $14.10 $12- $17
Landed LNG price/Mcm $353 - $424 $396 $498 $424- $601
TAPI PNG price/mmBtu (PTI, 2012)
$13 (including transit fees)
$12 (excluding transit fees = $0.5 ∗ 2 = $1)
Table 1: Landed price of imported LNG to India and estimated TAPI PNG price. mmBtu = millions of British Thermal Units, Mcm = thousand cubic meter (rate of conversion: 1 mmBtu = 0.0283Mcm)
- TAPI pipeline (Turkmenistan, Afghanistan, Pakistan, India):
The construction of the TAPI pipeline can invigorate the gas trading environment in the region in a positive way. To the gas exporter Turkmenistan which has been heavily dominated by Russia’ imports, the project expands the number of importers, thus counterbalances its natural gas export market (Brief, 2014). In addition, obviously, the project creates value to gas recipients (including both transit countries and end the terminal country).
Recently announced, Turkmenistan, Afghanistan, Pakistan, India want to end discussion over prices and quantities no later than February 2015 (India, others set 3-month deadline to fix TAPI pipeline issues, 2014). But only since 2018, the TAPI pipeline launches PNG market in India due to pipeline construction time. Also, the estimated maximum natural gas that India can have from TAPI pipeline is 38 million cubic meters per day, or roughly 13.87 billion cubic meters (BCM) per year, denoted by 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 for 30 years after 2018 (Maini & Vaid, 2013).
However, even with full functioning of TAPI, India still faces excess demand in natural gas market. Based on data of the International Energy Statistics, while the dry natural gas consumption of India in 2013 was over 50 billion cubic meters (BCM), it was exceeding the dry
2
(Argus, as cited in Abbasi & Kamal, p.5)
3
(Federal Energy Regulatory Commission, 2014)
10 natural gas production by 15 BCM. As a result, the TAPI with capacity constraint of yearly supply 13.87 BCM can’t be the only natural gas provider abroad. India would rely on a mixed channel of LNG and pipelines to import natural gas inter-regionally, at least until 2030 (IEA World Energy Outlook, 2002 c.f. Jensen, 2004, p. 77).
1.2. The importance of the Russia-India gas deal:
Based on the aforementioned outcome supporting the Altai pipeline of the Nov 8-10 APEC summit, it is more likely that Russia would supply natural gas for India via the first proposed route which passes merely through China (the proposed Russia-China-India pipeline). As long as the Russia-India deal is successfully signed to supply via the first route, it creates a geopolitical energy alliance among the two most populous countries and Russia, and increases cooperation in the east (Brief, 2014). The Russia-India gas deal is indeed important to worldwide geopolitical landscape.
1.3. Research question:
Although politics are always heavily influential on energy deals and lateral negotiations in reality (Homeriki, 2014), the standard production assumption of economic profit maximization is
remained in this paper. In that microeconomic principle, my paper hence tries to find the equilibrium value and supply quantity of the 30-year Russia-India deal as related to
exogenous/known variables in the India’s view of those issues. Consequently, another question: How can our stated answers remain true in the midst of undefined behavior of China and Russia in future? is aimed to answer.
1.4. Reviews of previous literature and discussion: 1.4.1. India’s natural gas demand:
As an attempt to clearly view Indian natural gas market, Parikha, Purohitb, & Maitraa (2007) have estimated the total natural gas demand in India up to 2011-2012. Its projection is
formulated mathematically by the GDP per capita and the population in India, providing a constant GDP by industry (Parikha, Purohitb, & Maitraa, 2007). However, the agricultural, industrial and service share of the India’s GDP altered in 2012-2013, (The Economic Times, 2013).As their GDP-by-industry assumption didn’t hold, their estimated model is not usable for the time afterwards.
11 Hence, I would like to regress the natural gas demand of India on the two variables based on the more updated population and GDP per capita data set on The World Bank data page. The data of dry natural gas production and consumption could be found on the International Energy Statistics page of EIA website. In this paper, the natural gas quantity unit is billion cubic meters (BCM). If their methodology is still correct, my estimates in their tactic should match real historical data, otherwise a difference between estimated and real consumption can be observed.
Up until 2002, India had not imported LNG or dry natural gas for domestic consumption, total dry natural gas production was exactly equal to total dry natural gas consumption.
Therefore, Indian natural gas demand up until 2002 is the dry natural gas consumption/ production. The estimation formula for total natural gas demand of India from 1980 to 2002 is the following (see Figure 2):
𝑄𝑄1980−2002𝐷𝐷 = 0.0000000822 ∗ 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − 0.0208136 ∗ 𝐺𝐺𝐺𝐺𝑃𝑃/𝑐𝑐𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − 51.77033
Figure 2: The total consumption/production of dry natural gas and estimated natural gas demand of India from 1980 to 2002 (no excess demand and production perfectly met consumption). Illustratively, drycsumpb is the real historical data of dry natural gas production; and estimated dry demand is its estimation based on my 1980-2002 formula.
However, applying the estimation formula for 1980-2002 to subsequent periods, we underestimate the natural gas demand as the estimated natural gas demand was lower than the consumption of dry natural gas (see Figure 3). Whereas positive imports of both LNG and dry natural gas were recorded (International Energy Statistics), it implies excess demand in Indian natural gas market in the subsequent years after 2002.
0,00 5,00 10,00 15,00 20,00 25,00 30,00 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 estimated dry demand drycsumpb
12 Figure 3: Estimated dry natural gas demand by the 1980-2002 formula and Indian actual dry natural gas consumption (source: International Energy Statistics)
Possibly, there are two reasons for such a figure discrepancy. Firstly, the approach to model the gas demand, suggested by Parikha, Purohitb, & Maitraa (2007), might be
inappropriate. Although population and GDP per capita are growing, their previously-estimated parameters have not accumulated the growth. Therefore, different samples would produce different parameters in their estimation equation. When a model can’t predict the out-of-sample, it indeed loses its value. Another possible reason is the positive omitted variable bias (as our estimated demand is lower); we might have neglected useful variables out of the model. One suggestion for a positive omitted variable is the price difference of oil and gas. Intuitively, the cheaper the natural gas is compared to an alternative energy source (oil), the more its demand is.
The puzzle of demand projection in India has not yet been properly solved. Due to the lack of research competence, reliable data access and time, the future natural gas demand of India is left as an exogenous variable in my paper.
1.4.2. An equilibrium analysis of a natural gas transnational pipeline system: summary and the author’s discussion:
Grais & Zheng (1996) game-theoretically approached the Western natural gas chain Russia – Eastern Europe countries - Western Europe countries by a Stackelberg sequential game. The game consists of three layers of players: a monopolistic supplier, a transit country, and a consumer. Each player rationally maximizes the profit payoff and demands a certain quantity, depended on a determined pricewhich is announced in their domestic currency. Therefore,
13 exchange rates are explanatory variables in the analysis of Grais and Zheng. Each player has a decision variable (Grais & Zheng, 1996, p. 65). A consumer demands how much gas to import to maximize its utility, given quantity and price of other goods consumed. A transit country introduces transit tariff per unit, endures unit cost and a fixed cost of the transistion. A supplier then, knowing that the downstream players react, maximizes its profit. In the end, the final price of the exported gas is determined by Russia dependent on price, quantity of other consumptions in the consuming country, transit fee, cost factors in Russian payoff and exchange rates (Grais & Zheng, 1996, p. 67).
Having studied their approach in that case, the Russia-India deal is though unlikely to have the same approach. In their paper, Russia is a monopoly in the near future, able to uniquely decide the price, and the two other players adjust their decision accordingly (Grais & Zheng, 1996, p. 67). However, the monopolistic position of one gas exporter, which makes the
hierarchical Stackelberg game setting reasonable in the Western gas chain, does not exist in the Indian natural gas supply market competitive among LNG exporting countries, TAPI gas, domestic gasThat is one reason why a hierarchical Stackelberg approach is inappropriate for this Russia-China-India deal. A second minor reason is that a hierarchical Stackelberg approach is not the sole solution. As there is no evidence of a sequential interaction between Russia and India in determining their decision, a simultanous interaction possibility is not rejected. Besides, the role of a transit country is assumed as transportation route and transit fee justification, independent in relationship with both the exporter and importer. The equilibrium price decision of Russia-China-India deal is therefore irrelevant to China. Furthermore, exchange rates are not used in my paper, as a universal currency, namely, dollar (Rapoza, 2015) is a price platform in an international market. The market of natural gas is global (Jensen, 2004), therefore; any currency conversion is unnecessary in my analysis.
Alternatively to the inappropriate hierarchical Stackelberg, the pairwise Cournot competition among Indian gas exporters can address the query, in the presence of natural gas supply competition. However, an arrays of assumptions are prerequisite in this paper to qualify an alternative Cournot game between Russia-India deal and TAPI, within PNG projects.
Incomplete information sharing among agents in the PNG market (TAPI and Russia-India deal) is requisitely assumed. It means that the imported PNG quantity contracted in each projects per year is confidential, and hence TAPI and Russia-India deal simultenously interact and play
14 quantity in Cournot. In my paper, the competitively-priced commodity LNG and Indian PNG are price competitors; and within Indian PNG, given its prices, the deals are quantity competitors. Ultimately, under assumptions, a price link analysis (in term of profit maximization for Russia) and an analysis of pairwise Cournot competitions in the gas supply market are followed to find the equilibrium deal factors.
1.5. Structure outline:
This paper comprises of four main parts, the first of which, the Introduction, has been presented. After an overview of background information surrounding the Russia-India gas deal and
discussion about the previous literatures, the combination of a price link game and detailed analysis of pairwise Cournot competitions is confirmed as my selected approach.
The next is the Methodology part where assumptions, relevant variables (with associated acronyms), data sources, and analysis steps are described. Briefly after the price link analysis, I will categorize the 30 years, since the effective year of Russia-India pipeline, into different periods, and then apply Cournot interaction. Accordingly, the current value of the deal can be found by discounting the profits to presence (𝑃𝑃𝑉𝑉𝑡𝑡 means present value discounted to time t, then the current value of the deal is 𝑃𝑃𝑉𝑉2015). Additionally, to stabilize the obtained equilibrium value of the deal and supply quantities, China, as a transit country, is required to no deviation over the 30 deal years. After that, both the equation of equilibrium deal factors and an expansive analysis of no siphoning (the deviation game analysis) are presented in the subsequent Discussion and Results part. In the end, we arrive the Conclusion part which summarizes the most remarkable findings of this paper.
2. Methodology:
The assumptions, that I am going to use in order to answer the first research question about equilibrium price and value of the Russia-India deal, are listed in this following section 2.1.
2.1. Assumptions:
• Dry natural gas is considered the only domestic production at least in 30-40 years and a constant rate of declining domestic dry natural gas production = 0.18 from 2013 onwards: in order to make domestic production 𝑄𝑄𝑑𝑑𝑑𝑑𝑚𝑚𝑑𝑑𝑑𝑑𝑡𝑡𝑑𝑑𝑑𝑑 exogenous.
15 • Perfect Indian market information merely known by one rational central body (for
example, the Ministry of Oil and Natural Gas in India), hence an inelastic natural gas demand curve at a specific time: 𝑄𝑄𝐷𝐷 is exogenous. It also implies that other agents in the Indian natural gas market bear incomplete information: the simultaneity assumption of gas players and hence, the Cournot applicability, in results, are activated.
Furthermore, the central body can figure out the Indian LNG market function by a regression of 10-year historical data of yearly average landed LNG price and LNG imported quantity from 2004-2014: 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = 𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿. According to Table 1, the 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 in 2014 is higher than the 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 in 2013 and the 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 is predicted to increase over time (U.S Energy Information Administration, n.d.-a); therefore, the parameter 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 is positive.
• No external shocks to LNG supply curve in the 30-40 years: to make the 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 estimation
function applicable in later years: αLNG and βLNG are exogenous.
• The calculated 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 , 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 are fixed during 30 years of contract if both
Russia and the transit country China do not deviate. Possible deviations of each player is defined and further investigated in the deviation game analysis.The transit fee is assumed as an addition to the unit cost by the importer. Both pipeline projects TAPI and Russia transmitting gas to India cost India a constant rate per unit, which is transit fee:
𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑃𝑃𝑃𝑃𝑑𝑑 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚. The transit fee India endures per pipeline project depends on how
many countries it goes through and how high one transmitting country charges. In TAPI pipeline, Afghanistan, Pakistan equally charge India $0.5/mmbtu (equivalently,
$17.5/Mcm) each of transit fee (Maini & Vaid, 2013).
• Assuming that all relevant countries (China, Afghanistan, and Pakistan) charge same level of transit fee, it induces that 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 > 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚. Because India is the payer of those transit fees, the 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 and 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 are, on the side of India, exogenous variables in this analysis.
• Consumers in India buy the cheapest available natural gas in the market (competition in price among suppliers). Assuming that transmitting cost inside India is small and
negligible, the consumers regard the selling/average landed price of imported natural gas 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇, 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚, 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿as the sole navigator of their gas consumption choice.
16 • PNG is more favorable than LNG. If the price of PNG and LNG are equal, PNG is
always consumed in priority.
• No more PNG projects in planning in near 30-40 years: the game setting is fixed with 3 players: LNG, Russia-India and TAPI.
2.2. Strategic pricing analysis:
In order to link prices of TAPI, Russia-India deal, PNG and LNG together, I must insert the game analysis of prices here.
There are two pricing games. The first one is between TAPI and Russia-India price deal, the two prices 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 and 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 make up the weighted average price of PNG:
𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 = 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇∗𝑄𝑄𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
𝑇𝑇𝐿𝐿𝐿𝐿 + 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚∗
𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿
, in which 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇, 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚, 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿, 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 are equilibrium quantities of TAPI, Russia-India deal, total PNG and total LNG at specific points in timeline that equate natural gas export
supply 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿+ 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 and total natural gas import demand 𝑄𝑄𝐷𝐷− 𝑄𝑄𝑑𝑑𝑑𝑑𝑚𝑚𝑑𝑑𝑑𝑑𝑡𝑡𝑑𝑑𝑑𝑑 = 𝐴𝐴. The natural gas import demand 𝐴𝐴 increases in time 𝑃𝑃 because total gas demand swells while domestic production plunges as time passes (𝑑𝑑𝑇𝑇
𝑑𝑑𝑡𝑡 > 0).
𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 + 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 = 𝑄𝑄𝐷𝐷− 𝑄𝑄𝑑𝑑𝑑𝑑𝑚𝑚𝑑𝑑𝑑𝑑𝑡𝑡𝑑𝑑𝑑𝑑 = 𝐴𝐴(𝑃𝑃)
The second one is between the PNG price and the LNG price. A sheer difference between PNG and LNG is that PNG faces capacity constraint due to pipeline size while LNG contracts are easy and fast to make (Abbasi & Kamal, p. 2), hence, has no capacity constraint. In this case, the capacity constraint of the TAPI, Russia-India deal and PNG are 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇, or 13.87 𝐵𝐵𝐵𝐵𝐵𝐵 in numbers, 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 and 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝐿𝐿𝐿𝐿 respectively. After the two brief pricing games, a holistic list of possible scenarios is introduced.
2.2.1. Game 1: Price of TAPI and Price of R-I deal in the Indian PNG market:
As a late comer in the Indian gas market, the Russia-India deal can see the final price of TAPI and decide theirs. Plus, Russia in the Russia-India gas deal also discusses which size of its pipeline is. In other words, it is decisive in whether Russia-India gas deal is supplied at its
17 capacity constraint (relatively small pipeline), or otherwise (relatively large pipeline). According to the profit maximization principle, the final price of the Russia-India deal is in the highest-profit scenario for Russia among any of other pricing scenarios.
If 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇> 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚: Comprehending that the TAPI never exiles the market (as that constructed pipelines are irreversible ensures its role), a price war -a predatory behavior- does no good to Russia. Hence, the Russia-India deal will not be charged lower price than the TAPI.
Therefore, that 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 ≤ 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 is a plausible solution.
2.2.2. Game 2: Average price of LNG and price of PNG: 𝑷𝑷𝑳𝑳𝑳𝑳𝑳𝑳 and 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳
Strategies 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 > 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 < 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 = 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 Why India signs the Russia-India deal besides the TAPI?
Irrational By increasing number of low-cost foreign gas suppliers (PNG), India wants to lower average gas price.
- Increase capacity supply to cope with current excess demand.
- No excess demand
currently but in future: India signs the deal now before their bargaining position becomes weaker. Specific price and quantity (continued) 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 = 0, 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 = 0. Operating pipelines will make a loss. This pricing scheme is never an optimal strategy.
Because of lower price than LNG, PNG is supplying at its maximum capacity. 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 13.87 , 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 =
𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚.
Not specified yet, more analysis followed
18 In short, India wants to sign Russia-India deals for either of these two reasons: to lower price or to address current/potential excess demand. Therefore, that 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 ≥ 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 is a plausible solution of the pricing game two. Combining solutions of the two games, three possible pricing scenarios are listed below:
Scenario A: 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇= 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 and 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 Scenario B: 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇= 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 and 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿
Scenario C: 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 and 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿: Rewriting it as 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 ≥ 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
There is no combination of that 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 and that 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿 because in that scenario, the 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿certainly disadvantages the Russia-India deal against the no-constraint cheaper LNG supply.
The Russia-India deal is the final player in the India natural gas, compared to TAPI and LNG and will position its price to a specific scenario. Each scenario is analyzed and summed up with the profit of Russia-India deal. The profits are compared to find the highest corresponding with the scenario. That scenario finalizes relationship and equation for equilibrium prices and quantities of Russia-India gas at different time – primary ingredients of our answer to the research question.
In addition, the Russia-India gas deal, as well as the TAPI project, have gap years between the year that value of the deal and quantities are decided (decision year) and the effective year that the pipeline actually goes operated (effective year). Therefore, to begin with, four time periods are formed from the near 30-to-40-year future (the indicated “a” is the number of years that Russia-India deal gets effective after the effective year of TAPI):
• Period 0: 2015-2018: LNG and domestic production.
• Period 1: 2018- 2018+a: Only TAPI is in PNG market, LNG and domestic production. • Period 2: 2018+a – 2048: Both TAPI and Russia-India deal is in PNG market, LNG and
19 • Period 3: 2048-2048+a: Russia-India deal is in PNG market, LNG and domestic
production.
2.3. Discounting approach and deviation game analysis:
After having solved equilibrium in period 1, 2 and 3, we could find the value of the deal by discounting method to presence, which is year 2015:
𝑃𝑃𝑉𝑉2015=(1 + 𝑟𝑟)1 3+𝑚𝑚∗ 𝑃𝑃𝑉𝑉2018+𝑚𝑚+(1 + 𝑟𝑟)1 33∗ 𝑃𝑃𝑉𝑉2048
𝑃𝑃𝑉𝑉2015, 𝑃𝑃𝑉𝑉2018+𝑚𝑚and 𝑃𝑃𝑉𝑉2048 are respectively the discounted sum of the profits in period 2 and 3
to year 2015, the discounted sum of profits in period 2 to year (2018+a), and the discounted sum of profits in period 3 to year 2048. The rate 𝑟𝑟 is the risk-free interest rate, listed on the main page of Reserve Bank of India.
In equilibrium, the Russia-India gas deal is free of non-cooperative behavior (a deviation game is introduced later). To solve the cooperation/deviation game, numerous new variables are generated: 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚, 𝑃𝑃𝐼𝐼𝑑𝑑𝑛𝑛𝑇𝑇𝐿𝐿𝐿𝐿𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚, 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚 are respectively the prices of Russia-China gas deal, the punishing higher price of Russia-China gas if China siphons the gas of Russia-India deal and the average landed LNG price of China. The discount rate 𝛿𝛿𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚is how patient China is to future profit and valued in range of 0 to 1. The higher 𝛿𝛿𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚 is, the more unlikely China will deviate. For a stable equilibrium, the minimum 𝛿𝛿𝑚𝑚𝑑𝑑𝐼𝐼𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚, based on those three prices and transit fee 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚, conditionally belongs to the lower part �0;1
2 �.
3. Discussion and Results:
3.1. Price link analysis via three scenarios:
As an aforementioned, Russia-India deal is beneficial to India and hence signed if it either lowers gas price or addresses current/potential excess demand. This is one base to rationalize the best scenario among those three. The second base is certainly the profit maximization principle. The next part is exploiting those two reasoning bases.
20
3.1.1. Scenario A: 𝑷𝑷𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹 = 𝑷𝑷𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰= 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳 and 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳 = 𝑷𝑷𝑳𝑳𝑳𝑳𝑳𝑳: Russia-India deal
doesn’t lower average price, therefore, excess demand is currently/potentially revealed. The profit of Russia-India is:
𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = (𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) ∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = [αLNG− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚+ βLNG∗ (𝐴𝐴 −
𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇− 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚)] ∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚.
Russia-India deal maximizes its profit based on quantity choice. Taking the first derivative of the profit with respect to (w.r.t.) 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 as 0, we have its best response (BR) function:
∂𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ∂𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = αLNG− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚+ βLNG∗ (𝐴𝐴 − 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) − 2 ∗ βLNG∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 0 → 𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚(𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) =αLNG− 𝑐𝑐2 ∗ β𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 LNG + (𝐴𝐴 − 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) 2 Repeating the same procedure to TAPI, we find out its best response:
𝐵𝐵𝑅𝑅𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇(𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) =αLNG2 ∗ β− 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 LNG +
�𝐴𝐴 − 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚�
2 Two additional comments:
∂𝜋𝜋𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅,𝐼𝐼𝐼𝐼𝐼𝐼𝑅𝑅𝑅𝑅 ∂𝑄𝑄𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅,𝐼𝐼𝐼𝐼𝐼𝐼𝑅𝑅𝑅𝑅= 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− βLNG∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 0 ↔ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 < (𝑇𝑇𝐿𝐿𝐿𝐿𝐿𝐿−𝑑𝑑𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅,𝐼𝐼𝐼𝐼𝐼𝐼𝑅𝑅𝑅𝑅) βLNG and ∂𝜋𝜋𝑇𝑇𝑇𝑇𝑇𝑇𝐼𝐼 ∂𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝐼𝐼= 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇− βLNG∗ 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇> 0 ↔ 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇< (𝑇𝑇𝐿𝐿𝐿𝐿𝐿𝐿−𝑑𝑑𝑇𝑇𝑇𝑇𝑇𝑇𝐼𝐼) βLNG
are to graph the profit with respect to quantity in each PNG project (See figure 4). The profit increases in any additional quantity produced when the quantity is less than 𝑇𝑇𝐿𝐿𝐿𝐿𝐿𝐿−𝑑𝑑𝑅𝑅
𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 where i stands for PNG project name: the TAPI or the Russia-India.
21 Figure 4: Profit and quantity illustration when 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚= 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇= 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿= 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿. When a Nash equilibrium quantity is within the constraint range, the supply level is certainly Nash. Reversely, if a Nash equilibrium quantity
is not reached because of constraint (𝑄𝑄𝐿𝐿𝑁𝑁> 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚), the supply quantity is the constraint level, when higher supply gives higher profit (0 < 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚<(𝑇𝑇𝐿𝐿𝐿𝐿𝐿𝐿−𝑑𝑑𝑅𝑅)
𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 ). The Nash is hardly equal to the constraint level – the reason is
explained later 𝑄𝑄𝐿𝐿𝑁𝑁≠ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚.
On the TAPI side, due to above-mentioned excess demand which is why India signs an additional PNG deal, the TAPI pipeline is foreseen to be supplying at its capacity. Hence, TAPI pipeline supplies the gas amount 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 13.87 𝐵𝐵𝐵𝐵𝐵𝐵. Applying figure 4 and its reasoning, it’s indeed prerequisite to have 13.87 <(𝑇𝑇𝐿𝐿𝐿𝐿𝐿𝐿−𝑑𝑑𝑇𝑇𝑇𝑇𝑇𝑇𝐼𝐼)
𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 .
Figure 5: The conjunction of 𝐵𝐵𝑅𝑅𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑃𝑃𝑃𝑃𝑑𝑑 𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 determines Nash equilibrium quantity of each PNG project in a Cournot competition when 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝑃𝑃𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿= 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿. The blue triangle is used in scenario A.1 when
22 From the equations of 𝐵𝐵𝑅𝑅𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑃𝑃𝑃𝑃𝑑𝑑 𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 and substitution technique, we will have the best response functions of both PNG players:
𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚(𝐵𝐵𝑅𝑅𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) = 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚−𝐿𝐿𝑁𝑁 = 3 ∗ 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿 ∗ (𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝐴𝐴 + αLNG+ 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇− 2 ∗ 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) 𝐵𝐵𝑅𝑅𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 �𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� = 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇−𝐿𝐿𝑁𝑁 = 3 ∗ 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿 ∗ (𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝐴𝐴 + αLNG+ 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 2 ∗ 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇)
Besides, we also have that 𝑄𝑄𝐿𝐿𝑁𝑁 ≠ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚 because otherwise, it indicates:
1
3∗𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ �𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝐴𝐴 + αLNG+ 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 2 ∗ 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇� = 13.87.
While both sides are exogenous, an equation is merely a coincidence. Based on aforementioned reasons, 𝑄𝑄𝐿𝐿𝑁𝑁 is either larger or smaller than 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚 in Russia-India deal (capacity supply or not) while the TAPI is certainly supplied at its capacity, two small scenarios are emerging.
That 𝑄𝑄𝐿𝐿𝑁𝑁 ≠ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚 induces either 𝑄𝑄𝐿𝐿𝑁𝑁 > 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚 or 𝑄𝑄𝐿𝐿𝑁𝑁 < 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚 and relates to whether one is supplying at capacity (see figure 4 and reasoning). In brief, one is supplying at capacity
when 0 < 𝑄𝑄𝑚𝑚𝑃𝑃𝑚𝑚 < (𝑃𝑃𝐿𝐿𝐿𝐿𝐺𝐺−𝑐𝑐𝑃𝑃)
𝛽𝛽𝐿𝐿𝐿𝐿𝐺𝐺 = 𝑄𝑄𝐿𝐿𝑁𝑁; and not doing when 0 < 𝑄𝑄𝐿𝐿𝑁𝑁 < 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚. It is called a constraint condition in my paper.
Scenario A.1: TAPI supply is at constraint, Russia-India gas deal is not at constraint. (𝑸𝑸𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰 = 𝟏𝟏𝟏𝟏. 𝟖𝟖𝟖𝟖)
As the Russia-India supply is not at constraint, the constraint condition points the following out: 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚(13.87) =αLNG− 𝑐𝑐2 ∗ β𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
LNG +
(𝐴𝐴 − 13.87)
2 < 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 In order to find the profit function of Russia-India deal, a function of the average price of LNG is needed. That price is found by the estimation of the LNG supply market:
𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 = 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 + 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 =αLNG− 𝑐𝑐2 ∗ β𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 LNG +
(𝐴𝐴 + 13.87) 2
23 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐴𝐴 − 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 =(A − 13.87)2 −αLNG2 ∗ β− cRussia,India
LNG
𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = 𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 = 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗(A − 13.87)2 + αLNG+ cRussia,India2 = 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
Hence, the Russia’s profit in the Russia-India deal can be calculated: 𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = �𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿∗ � 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A − 13.87) 2 + �αLNG− cRussia,India� 2 � 2 = 4 ∗ 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿∗ [𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A − 13.87) + αLNG− cRussia,India] = 1 4 ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑍𝑍
with 𝑍𝑍 = (𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A − 13.87) + αLNG− cRussia,India)for short. This abbreviation is helpful in my profit comparison part below.
Scenario A.2: TAPI supply is at constraint and Russia-India (R-I) gas supply is also at
constraint: (𝑸𝑸𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰= 𝟏𝟏𝟏𝟏. 𝟖𝟖𝟖𝟖, 𝑸𝑸𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹 = 𝑸𝑸𝒎𝒎𝑹𝑹𝒎𝒎𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹, 𝑸𝑸𝑷𝑷𝑳𝑳𝑳𝑳 = 𝑸𝑸𝒎𝒎𝑹𝑹𝒎𝒎𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹+
𝟏𝟏𝟏𝟏. 𝟖𝟖𝟖𝟖.
In this scenario, the average price of LNG is instantly estimated as other supply sources have already defined its output:
𝑃𝑃_𝐿𝐿𝐿𝐿𝐺𝐺 = 𝛼𝛼_𝐿𝐿𝐿𝐿𝐺𝐺 + 𝛽𝛽_𝐿𝐿𝐿𝐿𝐺𝐺 ∗ �𝐴𝐴 − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 13.87�
Hence, 𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = �𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 − 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 〖[𝛼𝛼〗𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ �𝐴𝐴 − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 13.87�� ∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = �𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗
𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚.
Comparison the profit of Russia-India deal under scenario A.1 and A.2: The scenario of
24 Scenario A.1: TAPI in
constraint, R-I not
Scenario A.2: Both in constraint Initial conditions 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇−𝐿𝐿𝑁𝑁 > 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 ↔ 13.87 <(𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿𝛽𝛽− 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) 𝐿𝐿𝐿𝐿𝐿𝐿 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇−𝐿𝐿𝑁𝑁 > 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 ↔ 13.87 <(𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿𝛽𝛽− 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) 𝐿𝐿𝐿𝐿𝐿𝐿 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚−𝐿𝐿𝑁𝑁 > 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ↔ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 <(𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝛽𝛽𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) 𝐿𝐿𝐿𝐿𝐿𝐿 Profit 𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 (𝑤𝑤𝑃𝑃𝑃𝑃ℎ 𝑍𝑍 = 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A − 13.87) + αLNG− cRussia,India) 1 4 ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑍𝑍 2 (𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) ∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
Higher profit than the A.2’s (reasons below)
Table 3: Summary table of scenario 2.A deselected scenario is blackened out.
It is started with initial conditions validation. The first condition of scenario A.2 is a common condition for both scenario A.1 and A.2. Plugging in values to inequalities:
1
3 ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ �𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝐴𝐴 + αLNG+ 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 2 ∗ 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇� > 13.87
↔𝑍𝑍3 +23 ∗ (𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 − 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇) >23 ∗ 13.87 ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿
↔𝑍𝑍2 > �13.87 ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 + 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� > 0 (1)
(Because we assumed 𝑐𝑐𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 > 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 and 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 > 0) The second condition for scenario A.2 indicates:
𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 <(𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝛽𝛽𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚) 𝐿𝐿𝐿𝐿𝐿𝐿
↔ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 < 𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝛽𝛽𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
25 ↔ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 <𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐2 ∗ 𝛽𝛽𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 𝐿𝐿𝐿𝐿𝐿𝐿 + (𝐴𝐴 − 13.87) 2 = 𝐵𝐵𝑅𝑅𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚(13.87) ↔ 0 < 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 <𝑍𝑍2 (2)
From (1) and (2), the two conditions in scenario A.2 can be noted as: �𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� >𝑍𝑍2 > 0
To overcome the profit comparison easier, a mathematical trick is used. It is this principle 0 ≤ 𝑃𝑃 ∗ 𝑏𝑏 ≤(𝑚𝑚+𝑏𝑏)4 2 (when a > 0 and b > 0). Combining �𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� > 0 with 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 > 0, that is correctly applied and leads to:
�𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ≤�𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� 2 4 = Z2 4 → �𝑍𝑍 − 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗ 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ≤ 4∗𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿∗ 𝑍𝑍
2 (it proved the statement on
the summary table)
In sum, the scenario A.1 yields higher profit to Russia-India deal than the scenario A.2; hence Russia-India deal chooses such a high capacity for the pipeline so that the pipeline can meet Indian gas demand without supplying at its capacity in the scenario A (also called as a one-price market)
Scenarios B and C are when LNG is more expensive than PNG 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 > 𝑃𝑃𝑇𝑇𝐿𝐿𝐿𝐿. A joint discussion for both scenarios is rising.
3.1.2. Scenario B: 𝑷𝑷𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹= 𝑷𝑷𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰 = 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳 and 𝑷𝑷𝑳𝑳𝑳𝑳𝑳𝑳 > 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳
3.1.3. Scenario C: 𝑷𝑷𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹> 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳 > 𝑷𝑷𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰 and 𝑷𝑷𝑳𝑳𝑳𝑳𝑳𝑳 > 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳: Rewriting it as 𝑷𝑷𝑳𝑳𝑳𝑳𝑳𝑳 ≥ 𝑷𝑷𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹,𝑰𝑰𝑰𝑰𝑰𝑰𝑹𝑹𝑹𝑹> 𝑷𝑷𝑷𝑷𝑳𝑳𝑳𝑳 > 𝑷𝑷𝑻𝑻𝑻𝑻𝑷𝑷𝑰𝑰.
Under the assumption that consumers buy the cheapest natural gas available in the market, PNG (consisting of both TAPI and Russia-India deal) is supplied at its most capacity. In denoting terms: 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿 = 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝐿𝐿𝐿𝐿, 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 13.87, 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚
26
Comparison of three scenarios:
In both scenario B and C, we have same function of the average LNG price 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = 𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (𝐴𝐴 − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚− 13.87). Scenario B and C derive similar the 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 and the
𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 compared to what of scenario A.2. However, the 𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 is not larger than the
𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 in scenario B and C; therefore, the profit of Russia-India deal in the scenario A.2 is at least
the profit in the scenario B and C. Also, according to the previous comparison between A.1 and A.2 (see table 3), the scenario A.1 produces higher profit to Russia than the scenario A.2. In short, the scenario A.1 is explicitly the best strategy for the Russia-India deal in term of its profit, when the TAPI supply is at constraint, the Russia-India gas deal is not at constraint (𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 13.87) and the prices converge at one unique level. Consequently, the equilibrium prices and quantities of Russia-India deal in period 25:
𝑃𝑃𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗(A − 13.87)2 + αLNG+ c2Russia,India 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 =αLNG− 𝑐𝑐2 ∗ β𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 LNG + (𝐴𝐴 − 13.87) 2 → 𝜋𝜋𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = �𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿− 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚� ∗ 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 4 ∗ 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿∗ [𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A − 13.87) + αLNG− cRussia,India] 5
Period 0: 2015-2018: LNG and domestic production
Period 1: 2018- 2018+a: Only TAPI is in PNG market, LNG and domestic production. 𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿= 𝑄𝑄𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇= 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 13.87
𝑄𝑄𝐿𝐿𝐿𝐿𝐿𝐿 = 𝐴𝐴(𝑃𝑃) − 13.87
𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿= 𝛼𝛼𝐿𝐿𝐿𝐿𝐿𝐿+ 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (𝐴𝐴(𝑃𝑃) − 13.87)
Period 2: 2018+a – 2048: Both TAPI and Russia-India deal is in PNG market, LNG and domestic production. The 𝑃𝑃𝑉𝑉2018+𝑚𝑚 is the discounted sum of profits in period 2 to year (2018+a).
Period 3: 2048-2048+a: Russia-India deal is in PNG market, LNG and domestic production. The 𝑃𝑃𝑉𝑉2048 is the discounted sum of profits in period 3 to year 2048.
𝑄𝑄𝑇𝑇𝐿𝐿𝐿𝐿= 𝑄𝑄𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 = 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿= αLNG+ βLNG∗ (𝐴𝐴(𝑃𝑃) − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 )
27 India has excess gas demand (as previously stated); therefore, any PNG project (the TAPI or the Russia-India deal) in period 1 and 3 certainly goes at full speed. As an outcome of the scenario A, all imported natural gas sources are equal in price. Therefore, in period 3, the Russia-India equilibrium price is 𝑃𝑃𝐿𝐿𝐿𝐿𝐿𝐿 = αLNG+ βLNG∗ (𝐴𝐴 − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ) (see footnote 5).
3.2. The equilibrium value of the Russia-India deal:
The next step to find equilibrium value of the deal 𝑃𝑃𝑉𝑉2015 is discounting profits at the risk-free interest rate 𝑟𝑟. With respect to the Russia-India deal, the discounted profits of the period 2 to year (2018+a) and the discounted profits of the period 3 to year 2048 are correspondingly
𝑃𝑃𝑉𝑉2018+𝑚𝑚= ∑2048𝑡𝑡=2018+𝑚𝑚(1+𝑟𝑟) 𝑡𝑡−2018−𝑅𝑅1 ∗ 1 4∗𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ [𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿∗ (A(t) − 13.87) + αLNG− cRussia,India] and 𝑃𝑃𝑉𝑉2048= ∑2048+𝑚𝑚𝑡𝑡=2048(1+𝑟𝑟)1𝑡𝑡−2048∗𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ∗ �αLNG− cRussia,India+ βLNG∗ �𝐴𝐴(𝑃𝑃) − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ��.
The value of the deal is the two present value discounted to 2015 given by this formula: 𝑃𝑃𝑉𝑉2015=(1+𝑟𝑟)13+𝑅𝑅∗ 𝑃𝑃𝑉𝑉2018+𝑚𝑚+
1
(1+𝑟𝑟)33∗ 𝑃𝑃𝑉𝑉2048. Hence, we have the first important conclusion of this paper: 𝑃𝑃𝑉𝑉2015= (1+𝑟𝑟)13+𝑅𝑅∑ 1 (1+𝑟𝑟) 𝑡𝑡−2018−𝑅𝑅 2048 𝑡𝑡=2018+𝑚𝑚 ∗ 4∗𝛽𝛽1𝐿𝐿𝐿𝐿𝐿𝐿∗ [𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 ∗ (A(t) − 13.87) + αLNG− cRussia,India] +(1+𝑟𝑟)1 33∗ ∑ 1 (1+𝑟𝑟)𝑡𝑡−2048∗ 2048+𝑚𝑚 𝑡𝑡=2048 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ∗ �αLNG− cRussia,India+ βLNG∗ �𝐴𝐴(𝑃𝑃) − 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 ��
Spanning over two periods 2 and 3, the equilibrium prices and quantities of the Russia-India deal are based on indicators of LNG market αLNGand 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿, capacity constraints of PNG projects (13.87BCM of the TAPI pipeline and 𝑄𝑄𝑚𝑚𝑚𝑚𝑚𝑚𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚 of the Russia-India deal), transit fee and estimated total natural gas import demand 𝐴𝐴(𝑃𝑃). Aggregately, the value of the Russia-India deal relies additionally on the risk-free interest rate 𝑟𝑟.
28
Parameter sensitivity analysis:
Taking the first derivatives w.r.t. exogenous decisive variables, positive result is indicated by +, and – otherwise. When one exogenous variable impacts none to the interest variable, painted blank means zero correlation or unspecified. The equilibrium prices and quantities and profit of the Russia-India deal in period 2 and 3 are notated in turn 𝑃𝑃2, 𝑄𝑄2, 𝑃𝑃3, 𝑄𝑄3, 𝜋𝜋2, 𝜋𝜋3 in this analysis table. The calculation part is added in the appendix (see appendix 2).
X Y 𝑃𝑃2 𝑄𝑄2 𝑃𝑃3 𝑄𝑄3 𝜋𝜋2 𝜋𝜋3 𝑃𝑃𝑉𝑉2015 𝑃𝑃 + + + + + + αLNG + + + + + + 𝛽𝛽𝐿𝐿𝐿𝐿𝐿𝐿 + - +* + - +* + +* 𝑟𝑟 - cRussia,India + - - - -
Table 4: Summary table of first derivatives 𝑑𝑑𝑑𝑑
𝑑𝑑𝑑𝑑. A blacken square indicates the first derivative is either null or unspecified (neither + nor -). Some first derivatives are conditionally specified. They are marked by a backslash
separating two conditions, of which * is the condition when 𝑐𝑐𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑𝑑𝑑𝑚𝑚,𝑇𝑇𝐼𝐼𝑑𝑑𝑑𝑑𝑚𝑚> αLNG.
3.3. Stability condition – deviation game analysis:
This deviation game analysis is additionally granted to strengthen the answer to the first research question by solving the second question: How can our stated answers remain true in the midst of undefined behavior of China and Russia in future? It uses a new skeleton of both old and
additional assumptions (the old assumptions in the section 2.1 are all included). However, assumptions in this section are gradually introduced at any points of the reasoning flow to back up arguments when needed.
Possible deviation actions of Russia and China are summarized illustratively in figure 6. The concerned deviation action is not supplying of Russia and siphoning of China (NSupply stands for not supplying and NSiphon means not siphoning in the figure).
29 Figure 6: Maps of deviation game. B,C,D,E,F,G are monetary profits of countries. Each letter is colored
differently by each country signalling color (Russia: brown, China: green, India: orange). In the tree branch NSupply, Russia gets no payment from India, China gains no fee
revenue/siphoning opportunity gain and India definitely loses. Hence, the payoff is (0,0,negative) in that NSupply case. As long as Russia supplies, its profit is positive (𝐵𝐵, 𝑁𝑁 ≥ 0). In addition, India worses off when China siphons, implying 𝐺𝐺 > 𝐺𝐺.
3.3.1. Russia – the supplier: deviation by gas cut-off:
The above value of the deal is found based on an array of assumptions; one of these is uncorrupted behavior of the transit country- China. The subsequent sub-section is concerned about conditions for no deviation from China. But first, before digging into mathematics, I would like to do some history – what Russia is prone to do if its gas transit country siphon off its deal and how likely Russia cease its supply.
In retrospect, the siphoning and no-supply have occurred already between Russia and Belarus. According to Wikipedia’s article “2007 Russia–Belarus energy dispute”, Belarus has siphoned the Russia gas and raised the energy conflict in which Russia asked Belarus for higher gas price supplied by Russia. Negotiations continued, and final terms have been reached: the sell Russian gas price increased for Belarus, Belarus’s transit fees for Russian gas increased, and part of the Belarus’s state-owned gas company has Russia on its ownership (2007 Russia–Belarus energy dispute). Also in the 2014 conflict with Ukraine, Russia has the cut-off threat and actually used it (Russia–Ukraine gas disputes).
30 Due to past conflicts with the west neighboring countries, it is logical to assume that
Russia is interested in tie a close political harmonious relationship with southern and eastern countries, and this assumption will be adopted in what follows. In the mind of Russia, increasing transactions with southern and eastern countries would pertains profit by diversifying supply destinations, therefore, reducing the “all in one basket” risk. Because high energy dependence can lead to political vulnerability and interdependence, as the Russia-EU energy relation and networks of gas pipelines in former Soviet states could prove (Bruce, 2005, p. 4), it is in the interest of all relevant countries to hedge as much future risks as possible, of which is the risk of being tricked by counterparts. To Russia, cooperation in the gas deal saves itself from future risks. Hence, I presume that Russia is unlikely to cease its gas to India and China in the near upcoming future of 30-40 years. This presumption is proved right after the deviation analysis by backward induction.
India would like to pay the deal yearly for the subsequent-year supply. A pre-payment scheme requested by India could secure India against the possible risk of Russian cut-off; while it also makes no change to Russia as Russia receives the payment before yearly supply.
Therefore, the yearly pre-payment schedule is reasonable for both India and Russia. In this paper, I would like to assume the yearly pre-payment scheme of India in the Russia-India deal. It is helpful in the following sub-section: China of this deviation game analysis.
3.3.2. China – the transmit country: deviation by siphoning.
What China would expect after siphoning the gas from Russia-India pipelines is a punishment from Russia. As Russia and China also made other energy deals on oil and gas, those deals are optional punishment tools in case China plays a fault transit country in the Russia-India deal, cheats on Russia. A lesson from the history hindsight is that punishment is either not supplying to China for 1 year or increasing the imported pipeline gas price of the Russia-China deal. In that case, the gas supplied by Russia would be replaced by imported LNG. Alternative punishment option is a higher imported PNG price.
If no one deviates, the deal is automatically rolled over to another 30 years. If China has not deviated yet, it’s expected to have the deal lasting infinitely and China gets the transit revenue forever:
𝐹𝐹 = 𝜋𝜋𝐶𝐶ℎ𝑑𝑑𝐼𝐼𝑚𝑚𝐿𝐿𝐷𝐷 = 1
