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What can be learned from the free destination option in the LNG imbroglio ?

Author

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  • Amina Baba

    (Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Anna Creti

    (Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Olivier Massol

    (IFPEN - IFP Energies nouvelles, IFP School, City University of London)

Abstract

We examine the profitability of flexible routing by LNG cargoes for a single supplier taking into account uncertainty in the medium-term dynamics of gas markets. First, we model the trajectory of natural gas prices in Asia, Northern America, and Europe using a Threshold Vector AutoRegression representation (TVAR) in which the system's dynamics switches back and forth between high and low regimes of oil price volatility. We then use the generalized impulse response functions (GIRF) obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics. Lastly, the valuation of destination flexibility in LNG supplies is conducted using a real option approach. We generate a sample of possible future regional price trajectories using Monte Carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability. Our results portend a substantial source of profit for the industry and reveal future movements of vessels. We discuss the conditional impact of destination flexibility on the globalization of natural gas markets.

Suggested Citation

  • Amina Baba & Anna Creti & Olivier Massol, 2020. "What can be learned from the free destination option in the LNG imbroglio ?," Post-Print hal-02955119, HAL.
    • Handle: RePEc:hal:journl:hal-02955119
    DOI: 10.1016/j.eneco.2020.104764
    Note: View the original document on HAL open archive server: https://ifp.hal.science/hal-02955119v1
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    Cited by:

    1. Yu Yong Ung & Park Sung Ho & Jung Dong Ho & Lee Chang Hee, 2020. "Improving Liquefied Natural Gas Bunkering in Korea through the Chinese and Japanese Experiences," Sustainability, MDPI, vol. 12(22), pages 1-15, November.
    2. Feng, Meihong & Zou, Donghang & Hafeez, Muhammad, 2024. "Mineral resource volatility and green growth: the role of technological development, environmental policy stringency, and trade openness," LSE Research Online Documents on Economics 121592, London School of Economics and Political Science, LSE Library.
    3. Feng, Meihong & Zou, Donghang & Hafeez, Muhammad, 2024. "Mineral resource volatility and green growth: The role of technological development, environmental policy stringency, and trade openness," Resources Policy, Elsevier, vol. 89(C).

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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