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Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price

Author

Listed:
  • Asche, Frank

    (UiS)

  • Osmundsen, Petter

    (UiS)

  • Oglend, Atle

    (UiS)

Abstract

This paper investigates the economic value of trade when prices of transportation services are endogenous to cross-market price spreads. This is relevant for liquefied natural gas (LNG) exports. LNG transportation capacity is limited in the short-run, and long lead-times are involved in extending the transportation infrastructure. We establish empirically that LNG transportation costs have been endogenous to regional gas prices spreads. As such, transportation service providers have been able to capture part of the price spread. We proceed to develop a method to value LNG exports under conditions of endogenous transportation costs and market integration. We use this method to quantify the effect of endogenous transportation costs on the value of LNG exports from the US to Japan. Our analysis shows that when transportation costs are correctly treated as endogenous, the LNG export benefit can drop by as much as 20-50% relative to the case of exogenous cost.

Suggested Citation

  • Asche, Frank & Osmundsen, Petter & Oglend, Atle, 2015. "Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price," UiS Working Papers in Economics and Finance 2015/4, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2015_004
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    4. Bastianin, Andrea & Galeotti, Marzio & Polo, Michele, 2019. "Convergence of European natural gas prices," Energy Economics, Elsevier, vol. 81(C), pages 793-811.
    5. Hudák, Milan & Čermáková, Klára & Kadeřábková, Božena & Popescu, Irina Alina & Balsalobre-Lorente, Daniel, 2026. "From fragmentation to integration: Gas market convergence in Central and Eastern Europe in the aftermath of the EU energy crisis," Energy Policy, Elsevier, vol. 208(C).
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    7. Zhang, Dayong & Ji, Qiang, 2018. "Further evidence on the debate of oil-gas price decoupling: A long memory approach," Energy Policy, Elsevier, vol. 113(C), pages 68-75.

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • Q27 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Issues in International Trade
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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