The evolution of the long-term natural gas contracts in the changing industry environment

Abstract

Abstract

The evolution of the long-term natural gas contracts in the changing industry environment

Shohrat Baymuradovich Niyazmuradov Technology Management, Economics and Policy Program College of Engineering Seoul National University

The purpose of the dissertation is to look into the developments in the natural gas industry and markets happening on the global and regional level approaching from the lens of evolution of long-term contracts that are likely to have effects on the country level with regards to natural gas importing and exporting countries. This dissertation is made up of two essays. The first essay using instrumental variables methods, such as: two stage least squares (2SLS), generalized method of moments (GMM) and limited information likelihood (LIML) regressions empirically explores the evolution of the long-term contracts via analysis of the effects of market deregulation, technological change, an increase in LNG tanker fleet capacity, global economic recession to the length of the contracts for the sale and purchase of natural gas. In this context three models has been formulated. The first one analyzes pipeline gas contracts, while the second model looks into the liquefied natural gas contracts and the last one deals with both contracts. To sum up, overall results indicate that the duration of the contracts tended to decrease on average due to occurrence of the aforementioned factors and events. The only point is that LNG contracts concluded during the global economic recession tend to be longer on average, but more flexible at the same time. In the second essay, using probit model with endogenous covariate we are exploring the LNG market and trade flexibility brought by the ability of liquefied natural gas cargo diversion via analysis of the determinants for the choice of flexible destination clauses in long-term liquefied natural gas sales and purchase agreements. We defined the destination clause as the DES delivery terms stipulated in the contracts concluded between the seller (exporter) and buyer (importer) of the chilled gas. Therefore, we analyze the effect of the factors that are prevalent in the global gas markets - and LNG markets in particular - today for the choice of FOB contracts. To sum up, the findings clearly imply that the most of the factors, developments and unfolding in the current liquefied natural gas markets, industry and value chain links favor or affect the choice of more flexible contractual arrangement. Furthermore, this trend is likely to be persistent in the mid- and long-term further contributing to the overall flexibility of the LNG trade, which in its turn is likely to affect the overall flexibility of the global gas markets. To sum up, we believe that the results of quantitative analyses can be taken into account during the process of strategy formulation in the gas exporting and importing countries as majority of them use long-term contracts in the natural gas trade.

Keywords: Natural gas

LNG

long-term contracts, destination clause, technological change, transaction cost, gas demand security. Student number: 2013-30782 Technology Management Economics and Policy Program College of Engineering Seoul National University