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Changing Contract Structures in the International Liquefied Natural Gas Market : A First Empirical Analysis

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  • Sophia Ruester

Abstract

This paper provides an empirical assessment of long-term liquefied natural gas (LNG) supply contracts to determine optimal contract duration. We study the trade-off between contracting costs due to repeated bilateral bargaining and the risk of being bound in an inflexible agreement in uncertain environments. Furthermore, we add to the theoretical discussion an analysis of different dimensions of transaction frequency and their impact on governance choice. Estimation results of a two-stage model show that the presence of high dedicated asset specificity results in longer contracts thus confirming the predictions of transaction cost economics, whereas the need for flexibility reduces contract duration. With increasing bilateral trading experience between the same trading partners, contract duration decreases. We additionally observe that countries heavily reliant on natural gas imports via LNG are willing to forgo some flexibility in favor of supply security. Contracts dedicated to competitive downstream markets on average are shorter than those concluded with customers in non-liberalized import markets.

Suggested Citation

  • Sophia Ruester, 2009. "Changing Contract Structures in the International Liquefied Natural Gas Market : A First Empirical Analysis," Revue d'économie industrielle, De Boeck Université, vol. 0(3), pages 89-112.
    • Handle: RePEc:cai:reidbu:rei_127_0089
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    Citations

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    Cited by:

    1. Baba, Amina & Creti, Anna & Massol, Olivier, 2020. "What can be learned from the free destination option in the LNG imbroglio?," Energy Economics, Elsevier, vol. 89(C).
    2. Amina Baba & Anna Creti & Olivier Massol, 2020. "What can we Learn from the Free Destination Option in the LNG Imbroglio ?," Working Papers hal-03181028, HAL.
    3. Peter R. Hartley, 2015. "The Future of Long-term LNG Contracts," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    4. Chyong, C-K., 2019. "Challenges to the Future of European Single Market in Natural Gas," Cambridge Working Papers in Economics 1918, Faculty of Economics, University of Cambridge.
    5. Sophia Rüster, 2015. "Financing LNG Projects and the Role of Long-Term Sales-and-Purchase Agreements," Discussion Papers of DIW Berlin 1441, DIW Berlin, German Institute for Economic Research.
    6. Peter R. Hartley, 2015. "The Future of Long-term LNG Contracts," The Energy Journal, , vol. 36(3), pages 209-234, July.
    7. Yves Jégourel, 2016. "The development of the liquefied natural gas spot market: origin and implications," Research papers & Policy papers on Commodities & Energy 1602, Policy Center for the New South.
    8. Jean-Michel Glachant & Michelle Hallack & Miguel Vazquez, 2013. "Building Competitive Gas Markets in the EU," Books, Edward Elgar Publishing, number 15263.
    9. Omoregie, Uyiosa, 2019. "Value Creation in a 'Non-Producing' Enterprise," SocArXiv h2mv3, Center for Open Science.
    10. Chi Kong Chyong, 2019. "European Natural Gas Markets: Taking Stock and Looking Forward," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(1), pages 89-109, August.
    11. Chi-Kong Chyong, 2015. "Markets and long-term contracts: The case of Russian gas supplies to Europe," Cambridge Working Papers in Economics 1542, Faculty of Economics, University of Cambridge.
    12. Yves Jégourel, 2016. "The development of the liquefied natural gas spot market: origin and implications," Policy briefs on Commodities & Energy 1602, Policy Center for the New South.

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