LONG-TERM NATURAL GAS CONTRACTS EVOLUTION IN THE
CHANGING INDUSTRY ENVIRONMENT
Shohrat NIYAZMURADOV and Eunnyeong HEO
Technology Management, Economics and Policy Program
Seoul National University, Seoul, South Korea
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
OUTLINE OF THE PRESENTATION
1
INTRODUCTION
2
DATA AND METHODOLOGY
3
RESULTS OF AN EMPIRICAL ANALYSIS
4
CONCLUSIONS AND RECOMMENDATIONS
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
1
INTRODUCTION
LONG-TERM CONTRACTS AND GAS
EXPORTER COUNTRIES
•
They serve as strong basis for the
investment in gas infrastructure; (Crocker
and Masten, 1991)
•
Allow for proper distribution of market
risks; (Crocker and Masten, 1991)
•
Decrease the ex-post costs; (Williamson,
1985)
•
Ensure the demand security for the
produced gas;
•
Assist exporter in establishing market
share in the buyer’s market and in
maintaining it for the duration of the
contract. (El-Katiri, 2010)
FOR POLICYMAKERS
The change in the duration of
contracts is a prerequisite for:
•
revenue flow planning;
•
Facilitation of the future
demand security;
•
maintaining market share in
the importing country.
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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1
INTRODUCTION (2)
APPROACH
TRANSACTION COST ECONOMICS
INSTITUTIONAL ECONOMICS
ENERGY SECURITY
Minimizing transaction cost depends on:
(Coarse, 1937, Williamson 1975, 1983,
1985)
• Degree of Asset specificity;
• Level of Uncertainty;
• Frequency of transactions
Repercussions between contract length
and institutional frameworks. (Joskow
1987, 1988; Crocker and Masten 1985,
Mulherin, 1986.
The institutional and market changes in
the global gas industry is likely to affect
the length of contracts subsequently
decreasing the demand security for the
exporting countries
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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1
INTRODUCTION (1)
Instruments suppliers use for the enhancement of the security of demand
ECONOMIC
1.
Storage facilities;
2.
Long-term contracts;
3.
Control of transportation routes;
4.
Regular trials to offset or correct the changes in
POLITICAL
•
An attempt to use international
legislation to limit the freedom of
consumers to change their internal
legislation;
•
Producers have increasingly
cooperated with each other;
•
Dialogue between consumers and
producers;
•
Investing in the improvement of
reputation of stable supplier;
•
The ideas of integration;
regulation of consuming countries;
5.
Strategy of diversification

Diversify export markets;

Diversify energy production;

Move away from the export of raw energy
materials to oil and gas processing on the
national territory and to export of the
production of refineries and gas factories;

Diversify away from energy goods.
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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1
INTRODUCTION (3)
RQ1: What is the effect of changing
industry environment on the duration of
LTGC’s?
RQ 1.1 What is the effect of
transition from a monopoly industry
to competitive market structures in
gas industry on the average
contract duration?
RQ 1.2 What is the effect of global
economic recession on the average
duration of LTGC’s?
RQ 1.3 What is the effect of
absence of the destination clause
on the average duration of LTGC’s?
RQ 1.4 What is the effect of
technological progress on the
average duration of LTGC’s?
RQ 1.5 What is the effect of an
increase in the LNG carrier fleet size
on the average contract duration?
Hypothesis 1: Transition from a monopoly
industry to competitive market structures has
resulted in the shorter length of long-term
contracts.
Hypothesis 2: The global economic recession
has affected the duration of the long-term
contracts negatively.
Hypothesis 3: Availability of FOB delivery
basis can have an effect on the length of the
long-term contracts for LNG.
RESEARCH
QUESTIONS
AND
HYPOTHESES
Hypothesis 4: Technological progress will
result in shorter length of contracts.
Hypothesis 5: The increase in LNG fleet size
will be inversely related to the contract
duration.
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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2.DATA AND METHODOLOGY
2
DATA AND METHODOLOGY
•
The sample includes 124 long-term contracts for pipeline gas and 449 for LNG, concluded between 1963 and 2015;
•
Methodology: IV estimation based on 2SLS, GMM and LIML.
Legal acts concluded between exporter(s) of natural
gas and importer(s) with the duration of more than
4 years to purchase agreed upon volume of the
resource.
LONG-TERM
CONTRACTS
STRUCTURAL MODEL:
𝛾1 = 𝛽0 + 𝛽1 𝛾2 + 𝛽2 𝓏1 +… +𝛽𝑘 𝓏𝑘−1 + 𝓊₁ (1)
REDUCED FORM EQUATION:
𝛾2 = 𝛱₀ + 𝛱₁𝓏₁ + 𝛱₂𝓏𝑘 + 𝜗₂
(2)
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3.RESULTS OF EMPIRICAL STUDIES
3
RESULTS OF AN EMPIRICAL ANALYSIS: PNG, LNG AND ALL CONTRACTS
MODEL1: PNG Contracts,
MODEL 2: ALL Contracts
MODEL 3: LNG Contracts
DEPENDENT
VARIABLE: Contract
duration
EXPLANATORY
VARIABLES
POST2008: =1 for contracts
signed after 2008
Hypothesis 1: Transition from a monopoly
industry to competitive market structures has
resulted in the shorter length of long-term
contracts.
Hypothesis 2: The global economic recession
has affected the duration of the long-term
contracts negatively.
LIB_DUM: =1 for contracts
signed during or after 1998
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3
RESULTS OF AN EMPIRICAL ANALYSIS: MODEL 1: PNG CONTRACTS
Econometric model
Method of
OLS
estimation
Independent
Dependent
variables
variable: CD
OLS
First stage
regression
Dependent
variable: CD
Instruments:
LN_W_VOL
and
EXP_MIDD
LE EAST
LN_T_VOL
as exogenous
variable
LN_T_VOL
BUY_GER
BUY_UK
TKM_DUM
UK_DUM
NED_DUM
NOR_DUM
RUS_DUM
IMP_CHIN
A
IMP_INDIA
POST2008
-1.239
(1.0632)
-4.6989**
(1.8933)
4.3176
(3.5221)
-4.7912**
(2.0089)
-2.9533
(1.9524)
1.5902
(1.2988)
-.6068
(1.3519)
-1.014
(5.8414)
13.402**
(5.1534)
-3.8513***
(2.3103)
-3.1824**
(1.4661)
2 SLS
.0213
(.1081)
.0365
(.2137)
.5631***
(.1555)
-.414**
(.186)
-.0842
(.1349)
.0217
(.1765)
.1677
(.1149)
.0266
(.1494)
.5759**
(.2797)
.0351
(.3108)
LN_T_VOL
as
endogenous
variable
2.1253***
(.3822)
-1.0757
(1.067)
-4.628***
(1.7291)
6.1195***
(2.2789)
-5.8447***
(2.0783)
-2.1572
(1.407)
2.4099*
(1.3697)
1.0728
(1.2941)
1.5323
(2.2483)
14.1292***
(1.4994)
-4.0784**
(1.7707)
IV estimation
Method of
LIML
estimation
Independent
Dependent
variables
variable:
CD
Instrument:
LN_W_VOL
and
EXP_MIDD
LE EAST
LN_T_VOL
LN_T_VOL
as
as
endogenous
endogenous
variable
variable
2.1253***
2.0998***
(.3822)
(.3844)
-1.0757
-1.0716
(1.0666)
(1.0675)
-4.628***
-4.6262***
(1.7291)
(1.7296)
6.1195***
6.1651***
(2.2789)
(2.2518)
-5.8447***
-5.8714***
(2.0782)
(2.0859)
-2.1572
-2.1370
(1.407)
(1.408)
2.4099*
2.4306*
(1.3698)
(1.373)
1.0728
1.1154
(1.2941)
(1.299)
1.5323
1.5967
(2.2483)
(2.2204)
14.1292***
14.1477***
(1.4994)
(1.4974)
-4.0784**
-4.0841**
(1.7707)
(1.7695)
Econometric model
Method of
OLS
estimation
Independent
Dependent
variables
variable: CD
OLS
First stage
regression
Dependent
variable: CD
Instruments:
LN_W_VOL
and
EXP_MIDD
LE EAST
LN_T_VOL
as exogenous
variable
LIB_DUM
LN_DIFFOI
L
LN_OIL
YoS
No of
observations
F or Wald
chi2 statistic
R-squared
IV estimation
GMM
LIML
LN_T_VOL
as
endogenous
variable
-3.8924***
(1.451)
7.8130***
(1.5183)
-6.3034***
(1.6219)
-.1294**
(.0647)
Dependent
variable:
CD
Instrument:
LN_W_VOL
and
EXP_MIDD
LE EAST
LN_T_VOL
as
endogenous
variable
-3.8924***
(1.451)
7.8130***
(1.5183)
-6.3034***
(1.6219)
-.1294**
(.0647)
Dependent
variable:
CD
Instrument:
LN_W_VOL
and
EXP_MIDD
LE EAST
LN_T_VOL
as
endogenous
variable
-3.9104***
(1.4640)
7.8130***
(1.5216)
-6.3129***
(1.627)
-.1288**
(.0648)
265.97**
(127.72)
124
265.97**
(127.72)
124
264.79**
(127.88)
124
312.62**
(137.28)
124
-.1416
(.1994)
.4905***
(.1503)
-.3594**
(.1530)
-.0158*
(.0094)
1.1029***
(.0396)
.4968***
(.1742)
38.26**
(18.49)
124
17.51
6730.30
1352.96
1352.96
1351.23
0.7086
0.8941
0.6887
0.6887
0.6877
7.8136***
(1.6413)
-5.9289***
(1.7182)
-.1551**
(.0697)
3.1299***
(.3702)
LN_W_VO
L
EXP_MIDD
LEEAST
_cons
2 SLS
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3
Econom
etric
model
Method
estimation
RESULTS OF AN EMPIRICAL ANALYSIS: MODEL 2: ALL CONTRACTS
OLS
IV estimation
of
First
stage
regression
Independent
variables
LN_T_VOL
2.44***
(.2935)
Econometri
c model
2 SLS
GMM
LIML
Dependent
variable:
Length
Instrument:
LN_W_VO
L
Dependent
variable:
Length
Instrument:
LN_W_VO
L
Dependent
variable:
Length
Instrument:
LN_W_VO
L
1.249***
(0.215)
1.249***
(0.215)
1.249***
(0.215)
-1.6162
(1.1217)
-.0516
(.0467)
.3188
(1.1235)
2.8787*
(1.5802)
1.9126
(1.89)
3.4263*
(1.772)
2.0153
(1.6525)
1.1126
(1.70)
-.7889
(1.62)
2.2173*
(1.1371)
-.0365
(.0977)
-.0059
(.004)
.1596
(.1164)
.1602
(.14384)
.4030**
(.1750)
.4780***
(.1397)
.3016*
(.1564)
.1830
(.1484)
.1209
(.1518)
.2151*
(.1244)
-0.649
(1.13)
-.0808*
(.0468)
1.592
(1.18)
3.459**
(1.69)
4.229**
(1.976)
5.344***
(1.747)
4.003**
(1.733)
2.225
(1.775)
0.993
(1.709)
2.365*
(1.226)
-0.649
(1.13)
-.0808*
(.0468)
1.592
(1.18)
3.459**
(1.69)
4.229**
(1.976)
5.344***
(1.747)
4.003**
(1.733)
2.225
(1.775)
0.993
(1.709)
2.365*
(1.226)
-0.649
(1.13)
-.0808*
(.0468)
1.592
(1.18)
3.459**
(1.69)
4.229**
(1.976)
5.344***
(1.747)
4.003**
(1.733)
2.225
(1.775)
0.993
(1.709)
2.365*
(1.226)
EXP_AUS
1.0270
(1.7368)
.0599
(.1802)
2.533
(1.816)
2.533
(1.816)
2.533
(1.816)
IMP_INDIA
1.8862
(1.4646)
.2805***
(.100)
2.557*
(1.526)
2.557*
(1.526)
2.557*
(1.526)
IMP_CHINA
4.5198***
(1.0949)
.5062***
(.0906)
5.707***
(1.110)
5.707***
(1.110)
5.707***
(1.110)
GASTYPE
YoS
LNG_DUM
EXP_CONT_EUR
EXP_N_AMERIC
A
EXP_S_AMERIC
A
EXP_MIDDLEEA
ST
EXP_AFRICA
EXP_SE_ASIA
IMP_NE_ASIA
OLS
Method of
estimation
IV estimation
First stage
regression
Independen
t variables
FSU_DUM
TKM_DU
M
BUY_UK
BUY_GER
LN_OIL
LN_DIFFO
IL
POST2008
LIB_DUM
3RD_EN_
PKG
LN_W_V
OL
_cons
No of
observation
s
F or Wald
chi2
statistic
R-squared
3.084
8*
(1.65
32)
2.5223
(2.0781)
-3.3334***
(1.1003)
-.7424
(1.3501)
-2.4642**
(1.1326)
2.4610**
(1.2499)
4.3044***
(1.6423)
-3.5875***
(.8329)
-5.5953***
(1.5637)
.4244***
(.1429)
2 SLS
GMM
LIML
Dependent
variable:
Length
Instrument:
LN_W_VO
L
Dependent
variable:
Length
Instrument:
LN_W_VO
L
Dependent
variable:
Length
Instrument:
LN_W_VO
L
5.107***
(1.715)
5.107***
(1.715)
5.107***
(1.715)
3.880***
(1.24)
-3.315***
(1.140)
0.348
(1.39)
-2.493**
(1.199)
2.65**
(1.31)
4.11***
(1.57)
-3.65***
(0.844)
-5.19***
(1.47)
3.880***
(1.24)
-3.315***
(1.140)
0.348
(1.39)
-2.493**
(1.199)
2.65**
(1.31)
4.11***
(1.57)
-3.65***
(0.844)
-5.19***
(1.47)
3.880***
(1.24)
-3.315***
(1.140)
0.348
(1.39)
-2.493**
(1.199)
2.65**
(1.31)
4.11***
(1.57)
-3.65***
(0.844)
-5.19***
(1.47)
114.20
(92.57)
481
.1985
(.1575)
-.0051
(.1498)
.099
(.122)
-.1185
(.1083)
.1360
(.1137)
-.1233
(.421)
-.2461***
(.0802)
-.0126
(.4366)
1.056***
(.0317)
18.43**
(7.83)
481
173.35*
(92.89)
481
173.35*
(92.89)
481
173.35*
(92.89)
481
13.69
252.35
331.70
331.70
331.70
0.4598
0.8070
0.4180
0.4180
0.4180
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3
RESULTS OF AN EMPIRICAL ANALYSIS: MODEL 3: LNG CONTRACTS
DEPENDENT VARIABLE:
Contract duration
EXPLANATORY
VARIABLES
MODEL 3: LNG
Contracts
LIB_DUM=1 for contracts signed
after 2008
Hypothesis 1: Transition from a monopoly industry to
competitive market structures has resulted in the shorter
length of long-term contracts.
POST2008:=1 for contracts signed
after 2008
Hypothesis 2: The global economic recession has affected
the duration of the long-term contracts negatively.
FOB_DUM: =1 if the contract is
FOB
Hypothesis 3: Availability of FOB delivery basis can have an
effect on the length of the long-term contracts for LNG.
LN_TECH_PROG: measured as the
Hypothesis 4: Technological progress will result in shorter
length of contracts.
difference between the tanker with biggest
LNG transport capacity less average tanker
capacity in each year observed
LN_FLEETCAP:LNG tanker fleet
total capacity in the specific year
Hypothesis 5: The increase in LNG fleet size will be inversely
related to the contract duration.
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3
RESULTS OF AN EMPIRICAL ANALYSIS: LNG CONTRACTS
Econometric model
Method of
OLS
estimation
OLS
First stage
2 SLS
regression
Independent
variables
Dependent
variable:
LN_T_VOL
Dependent
variable: CD
LN_T_VOL
as exogenous
variable
IV estimation
GMM
LIML
Econometric model
Method of
OLS
estimation
Dependent
variable:
CD
Instrument:
LN_W_VO
L,
SELF_SUF
F_p
LN_T_VO
L as
endogenous
variable
Dependent
variable:
CD
Instrument:
LN_W_VO
L,
SELF_SUF
F_p
LN_T_VO
L as
endogenous
variable
Dependent
variable:
CD
Instrument:
LN_W_VO
L,
SELF_SUF
F_p
LN_T_VO
L as
endogenous
variable
Independen
t variables
1.2505***
(.3639)
1.2628***
(.363)
1.2407***
(.3643)
LN_TECH
_PROG
-3.3281***
(.8518)
-1.1167***
(.286)
LN_T_VO
L as
exogenous
variable
LN_T_VOL
2.3974***
(.30727)
GAS_CONS_
GROWTH
22.4249*
(2.8661)
3.9553***
(1.2373)
41.0844***
(4.1735)
42.7918***
(4.1302)
41.0362***
(4.1813)
LN_FLEE
TCAP
BUY_CHN
5.39***
(1.7588)
.54473***
(.1249)
7.8152***
(1.4449)
7.9184***
(1.43)
7.8281***
(1.4453)
LN_W_V
OL
SEL_QAT
1.4626*
(.7958)
.0596
(.0761)
1.5071*
(.8803)
1.4981*
(.8761)
1.5089*
(.8810)
SELF_SU
FF_p
BUY_US_UK
.8023
(1.2181)
-.1610
(.1862)
-1.2004
(1.9660)
-1.2306
(1.9479)
-1.1958
(1.9688)
_cons
POST2008
3.5898***
(1.3188)
.14715
(.1519)
3.254**
(1.5804)
3.0935**
(1.5773)
3.2569**
(1.5808)
LIB_DUM
-1.1825
(.9247)
-.47***
(.0576)
-1.5722*
(.8429971)
-1.6166*
(.8421)
-1.5767*
(.8430)
.8374
(.6908)
2.4663***
(.7045)
.102*
(.0571)
.1824***
(.0669)
1.7721***
(.7613)
2.3847***
(.7354)
1.774**
(.7612)
2.3993***
(.7360)
1.7755**
(.7619)
2.3784***
(.7359)
FOB_DUM
BUY_J_K_T
Dependent
variable:
CD
OLS
First
stage
regressi
on
Depende
nt
variable:
LN_T_V
OL
No
of
observation
s
F or Wald
chi2
statistic
R-squared
IV estimation
GMM
LIML
2 SLS
Dependent
variable: CD
Instrument:
LN_W_VOL,
SELF_SUFF_
p
Dependent
variable:
CD
Instrument:
LN_W_VOL,
SELF_SUFF_
p
Dependent
variable:
CD
Instrument:
LN_W_VOL,
SELF_SUFF_
p
LN_T_VOL
as endogenous
variable
LN_T_VOL
as endogenous
variable
LN_T_VOL
as endogenous
variable
-3.6893***
(.9955)
-3.5721***
(.9954)
-3.6954***
(.9958)
-.5878***
(.1723)
-.5970***
(.1719)
-.5833***
(.1725)
60.6308***
(9.41)
59.5436***
(9.409)
60.654***
(9.414)
164
164
164
187
.5963***
(.0889)
.4676***
(.0092)
1.1046**
*
(.0333)
.0002***
(.0000)
5.7225**
*
(.8708)
164
24.29
425.55
195.03
194.68
194.53
0.5195
0.9288
0.5166
0.5159
0.5174
62.583***
(8.38)
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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3
RESULTS OF AN EMPIRICAL ANALYSIS
PNG
LTC’s
Hypothesis 1: Transition from a
monopoly industry to competitive
market structures has resulted in the
shorter length of long-term contracts.
Hypothesis 2: The global economic
recession has affected the duration of
the long-term contracts negatively.
Hypothesis 3: Availability of FOB
delivery basis can have an effect on the
length of the long-term contracts for
LNG.
Hypothesis 4: Technological progress
will result in shorter length of contracts.
Hypothesis 5: The increase in LNG fleet
size will be inversely related to the
contract duration.
ALL
LTC’s
LNG
LTC’s
TYPE OF CHANGE
LIB_DUM
SHORTER
POST2008
PNG – SHORTER;
LNG- LONGER BUT
MORE FLEXIBLE
FOB_DUM
LONGER, BUT
MORE FLEXIBLE
LN_TECH_PRO
G
SHORTER
LN_FLEETCAP
SHORTER
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
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4.CONCLUSIONS AND RECOMMENDATIONS
4
CONCLUSIONS AND RECOMMENDATIONS
CONTRACTS
BECAME
SHORTER
LONGER LNG
CONTRACTS
BECAME
MORE
FLEXIBLE
EXPORTERS
STRATEGIES TO IMPROVE
DEMAND SECURITY AND
REVENUE FLOW
STABILITY
IMPORTERS
STRATEGIES TO BENEFIT
FROM FLEXIBILITY OF
CONTRACTS
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
17
4
CONCLUSIONS AND RECOMMENDATIONS
Instruments suppliers use for the
enhancement of the security of demand:
Pipeline
Gas to gas
LNG
Methanol
1. Storage facilities;
CNG
2. Long-term contracts:
Gas to solids
3. Control of transportation routes;
4. Regulation of consuming countries;
5. Strategy of diversification

Diversify export markets;

Diversify energy production;

Move away from the
export of raw energy
materials to oil and gas
processing
on
the
national territory and
to
export
of
the
production of refineries
and gas factories;

Gas
monetisation
options
Gas
hydrate
s
Gas to liquids
Syngas
(Co2+H2)
Gas to power
Electricity
DME
 Utraclean
diesel
 Naphta
 Lubricants
 Solvents
 Alpha
olefins
Heat
 Ammonia
 Fertilizers
Gas to
chemicals
 Formaldehyde
 Methyl
Tertiary
Butyl Ether
 Solvents
 Power
 Olefins
 Acetic Acid
 Gasoline
 Ethers
 Others
 LPG
substitut
e
 Diesel
 Power
Ammonia
Urea
Diversify away
from energy
40th IAEE International Conference, Marina Bay Sands, Singapore, 18-21 June 2017
goods.
18
THANK YOU
FOR YOUR
KIND ATTENTION!