An analysis of economic benefits of the Southern Gas Corridor

ABSTRACT

In this paper, we examine economic benefits and viability of the Southern Gas Corridor (SGC) for supplying natural gas to Europe from the Caspian Basin. In particular, we examine what will be the effects of natural gas supplies from the Caspian Basin on import prices and social welfare of the EU countries and Turkey. We also analyze profits of exporters and oil companies engaged in production and transportation of natural gas to Europe. We find that the SGC will reduce import prices and increase social welfare in the EU and Turkey. Our results also suggest that the SGC will generate noteworthy profits for exporters and oil companies engaged in the project and thus bring significant economic gains to all parties.

KEYWORDS:

• Azerbaijan
• Caspian basin
• consumer welfare
• natural gas
• southern gas corridor

Notes

¹ See, for example, Winrow (2009), Finon (2011), Roberts (2012), Bagirov (2012), Rzayeva (2013).

² In order to save space, we do not provide the full model and derivations, which are available upon request.

³ In fact, Russia currently builds South Stream and considers the possibility of constructing the third and fourth strings of the Nord Stream.

⁴ There is no consensus on the price elasticity of natural gas consumption in the literature (e.g., Al-Sahlawi, 1989). These elasticities are in line with other studies that also model the European natural gas markets. See, for example, Tsygankova (2010), Sagen and Tsygankova (2008), Golombek et al. (1995).