A Game-Dynamic Model of Gas Transportation Routes and Its Application to the Turkish Gas Market [Updated November 2003]

The purpose of this paper is to study an optimal structure of a system of international gas pipelines competing for a gas market. We develop a game-dynamic model of the operation of several interacting gas pipeline projects with project owners acting as players in the game. The model treats the projects' commercialization times major players' controls. Current quantities of gas supply are modeled as approximations of Nash equilibrium points in instantaneous "gas supply games", in which each player maximizes his/her current net profit due to the sales of gas. We use the model to analyze the Turkish gas market, on which gas routes originating from Russia, Turkmenistan and Iran are competing. The analysis is carried out in three steps. At step 1, we model the operation of the pipelines as planned and estimate the associated profits. At step 2, we optimize individual projects, with respect to their profits, assuming that the other pipelines operate as planned. At step 3, we find numerical Nash equilibrium commercialization policies for the entire group of the pipelines. The simulations show the degrees to which the planned regimes are not optimal compared to the Nash equilibrium ones. Another observation is that in equilibrium regimes the pipelines are not always being run at their full capacities, which implies that the proposed pipeline capacities might not be optimal. The simulation results turn out to be moderately sensitive to changes in the discount rate and highly sensitive to changes in the price elasticity of gas demand