Norway: A War Profiteer or Equitable Market Participant?" How much of Norway’s 2022 natural gas export revenues to the EU can be explained by the influence of the Russia-Ukraine conflict on natural gas prices using Russian supply shortfall of pipeline gas as a proxy . A Structural VAR Approach

Abstract

On the 24th of February 2022, Russia invaded Ukraine. The following months were characterized by major supply disruptions of Russian pipeline gas, soaring prices, and record revenues for Norwegian natural gas exports. This resulted in prominent political figures accusing Norway of being a war profiteer. In this thesis, we estimate how much of Norway ́s 2022 revenues from natural gas export to the EU can be explained by the influence of the Russia-Ukraine conflict on natural gas prices – using Russian supply shortfall of pipeline gas as a proxy. We construct a Structural Vector Autoregressive (SVAR) model for the EU-27 natural gas market. The main drivers of the natural gas price, in addition to the volume of Russian supply shortfall, are used in the SVAR model. Based on economic theory, the model has been constrained such that shocks in the individual drivers only affect other drivers contemporaneously if this reaction can be supported from a theoretical standpoint. This allows us to disentangle the relationship between the variables and it helps with interpreting the result and validating the model. The model is built with data on a daily frequency for seven key drivers of the natural gas price from 2016 - 2022. Utilizing a Historical Decomposition (HD), we break down the natural gas price changes into contributions from structural shocks in our model variables. We find the price of coal and Russian supply shortfall to explain the majority of the fluctuations in the natural gas price over 2022. The share of the fluctuations in the Natural gas price that is explained by the Supply Shortfall in the HD is extracted. This share is multiplied with Norwegian export volumes, and the natural gas price, to estimate the Norwegian natural gas export revenues of 2022. This approach attributes 334 billion NOK, or 27.18%, of Norway’s natural gas revenues for 2022 to the Russian supply shortfall. This estimate nuances the debate on Norway as a war profiteer as it indicates how much of the revenues can be attributed to the war. Context and validity are established by comparing our estimate to the government-published historical natural gas revenues, including 2022.