A network game analysis of strategic interactions in the international trade of Russian natural gas through Ukraine and Belarus Daisuke Nagayama a, ⁎, Masahide Horita b a Department of International Studies, University of Tokyo, Japan b Department of International Studies, University of Tokyo, Japan abstract article info Article history: Received 5 November 2011 Received in revised form 15 February 2014 Accepted 21 February 2014 Available online 3 March 2014 Keywords: Natural gas transport Network Game Bargaining power Flexible network Allocation Natural gas is an important source of relatively low-emission, low-cost, non-nuclear and abundant energy; however, the difficulty of storage and transportation adds geopolitical and geostrategic complexity to its interna- tional trade. Much of the global natural gas trade occurs through natural gas pipelines, which as an infrastructure is strictly specific to the transportation of natural gas. Therefore, the very structure of natural gas pipeline net- works can dictate the strategic relationship among countries involved in its trade. This paper applies a Network Game Model where these pipeline networks are modeled as graphs and respective value functions, and employs the Link-based Flexible Network Allocation Rule developed by Jackson (2005) as a solution concept to measure the relative power structure among these natural gas trading countries. The paper analyzes the case of trade between Russia, Ukraine, Belarus and Western Europe, and compares the results to existing analyses that employ a Cooperative Game Model in Characteristic Function Form and the Shapley Value as the solution concept. Whereas the results of the analysis conducted in the previous literature indicate that Russia's relative power was significantly stronger than other players both before and after the construction of the Nord Stream pipeline, the results provided in this paper draw a different conclusion. Ukraine's relative power was already equal to that of Russia before the Nord Stream. This may be understood as one of the underlying causes for the prolonged conflicts that occurred repeatedly in this region concerning natural gas trade. © 2014 Elsevier B.V. All rights reserved. 1. Introduction Global primary energy consumption is surging at a surprising rate. Compared to 1990 standards, global marketed energy consumption is projected to double by 2035 (IEA, 2010). Natural gas is gaining increased attention within this unprecedented growth, as it is a consid- erably cleaner source of hydrocarbon energy and the second largest source of energy for power generation. Given the energy security after- shocks of the Fukushima Nuclear Disaster in Japan and the shift in nuclear energy policy around the world, it is appropriate to suggest that the importance of natural gas as an alternative source of energy will continue to increase in the future. Not only is natural gas one of the most important sources of alterna- tive energy, but also it is arguably one of the most geopolitically and geostrategically complex natural resources due to the following three reasons: (1) like oil, its distribution is geographically uneven; (2) since by definition it exists as a gas it is difficult to store; and (3) the infrastruc- ture used for transportation (i.e., gas pipelines) are strictly specific to transporting natural gas, thus adding to the geopolitical complexity by invoking classical economic issues such as the hold-up problem. In order to mitigate the risks incurred by these characteristics of natural gas, various measures (e.g., long-term binding contracts, compensation to transit countries by explicit transit fees or gas price discounts, interna- tional consortiums, joint investment in pipelines) have been taken in order to protect bargaining positions, evade conflict and ultimately bene- fit from this geopolitically complex trade. Nevertheless, serious conflicts have occurred throughout the history of natural gas trade. The most classical and representative case is the trade of Russian natural gas through pipelines that pass through former Soviet nations (especially Ukraine and Belarus) en route Western Europe. Even after the collapse of the Soviet Union, Ukraine and Belarus benefited from quasi-domestic Russian natural gas prices that were significantly lower than Russian export prices to Western countries. However, as the global demand for natural gas continued to increase and Gazprom (Russia's state-owned natural gas enterprise) pursued higher profitability, Russia began to demand higher prices from Ukraine and Belarus. This resulted in over two decades of continuous bargaining and conflict, embodied in the planning and announcing of Energy Economics 43 (2014) 89–101 ⁎ Corresponding author at: Room 1303, 5-24-8 Shimbashi, Minato-ku, Tokyo 105-0004 Japan Masahide Horita Room 758, 5-1-5 Kashiwa-no-ha, Kashiwa, Chiba 277-8563 Japan. E-mail addresses: d.nagayama@07.alumni.u-tokyo.ac.jp (D. Nagayama), horita@k.u-tokyo.ac.jp (M. Horita). http://dx.doi.org/10.1016/j.eneco.2014.02.010 0140-9883/© 2014 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneco