Modeling Investment Decisions in Gas Pipeline Networks: A Game-theoretic Mixed Complementarity Problem Formulation and its Application to the Chinese Gas Market

Rapidly growing natural gas demand in China has formed a precondition to investigate the potential of several pipelines from Russia and other CIS countries, which could possibly head their flows to the Chinese natural gas market. The variety of proposed projects and the difference in their characteristics results in competition and, therefore, in order to assess the projects’ economic perspectives a game-theoretic approach is used. A two-step procedure for the problem’s game-theoretic formulation is proposed. In the instantaneous supply game the players have the possibility to supply natural gas to the market. Each player determines his or her supply levels in such a way that profits are maximized, taking into account the supplies of all other players. In the game of timing the players have to decide when to construct their pipelines. Due to the growing demand for natural gas, the time of entering the market plays an important role. The players seek to maximize the net present value of their investment by choosing the pipelines’ start of commercial operation from a discrete set of years. The equilibria obtained from the supply game are used to calculate the payoff matrices for each pipeline in the timing game. Both games are formulated and implemented as mixed complementarity problems which allows the analysis of the competition of up to 5 pipeline projects simultaneously. Results for the Chinese natural gas market are presented and discussed with an emphasis on sensitivity analysis.