Economics of the LNG Value Chain and Corporate Strategies An Empirical Analysis of the Determinants of Vertical Integration

Transcription

1 Economics of the LNG Value Chain and Corporate Strategies An Empirical Analysis of the Determinants of Vertical Integration Sophia Rüster und Anne Neumann Dresden University of Technology Chair of Energy Economics And Public Sector Management ENERDAY Dresden,

2 Agenda 1. Introduction 2. Literature Survey & Application to the LNG Industry 3. Data, Methodology and Results 4. Conclusions References -2-

3 Changing Structure of International LNG Trade Traditional situation: 1. Bilateral long-term contracts between LNG eport project and energy companies infleible SPAs, ToP. 2. Ship ownership embedded in these contracts. 3. Quantity risk allocated to the buyer, price risk allocated to the seller. Development today: 1. Contracts become more fleible (duration decreases, increasing LNG trade, decreasing costs, ). 2. Deregulation and liberalization. 3. Global players follow a strategy of vertical integration and strategic partnerships, order own vessels. Bilateral long-term contracts are still used, especially for green-field projects, but vertical integration offers another form of risk taking. Research question: What motivates firm s to integrate vertically along LNG value chains? -3-

4 Nominal Liquefaction Capacities 2005 vs Norway North America Russia Middle East North Africa Latin America West Africa Asia Oceania mtpa in 2005 mtpa in 2010 Australia Sources: IEA (2003), IEA (2004), Cedigaz (2004) -4-

5 European LNG Import Capacities 2005 vs Sources: IEA (2003), Cedigaz (2004) bcm/a in 2005 bcm/a in 2010 (nominal values) Miford Haven Montoir Isle of Grain Zeebrugge El Ferrol Bilbao Panigaglia Rovigo Sines Fos Cavaou Fos sur Mer Barcelona Sagunto Brindisi Marmara Huelva Cartagena Revithoussa -5-

6 Global Player s Activities along the LNG Value Chain Player Production Liquefaction Transport Regasification Distribution FROM UPSTREAM Eon Mobil BP Conoco Philipps Shell () () DOWNSTREAM Suez Group Repsol YPF Gaz de France ENI () - GERMANS EON Ruhrgas Wintershall RWE - - () ()

7 Motivation for the Analysis Global player s incentives to integrate vertically along an actual LNG value chain Project Prod. Liquef. Transp. Regas Sales 1 2 RasGas I Player XY 1 RasGas II Player Y 2 Dragon South Hook Player XY 3 Player XY 4 using an econometric model under a transaction cost view to eamine the relationship between different eogenous variables (measurements of TAC, industry and project characteristics) and the endogenous variable, the degree of vertical integration. Main hypothesis: With rising TAC the degree of vertical integration increases. -7-

8 Agenda 1. Introduction 2. Literature Survey & Application to the LNG Industry 3. Data, Methodology and Results 4. Conclusions References -8-

9 Theoretical Background Different theories eplaining incentives for vertical integration eist, but as Joskow (2003) stated there is not and there will never be one uniform theory of vertical integration. Transaction costs approach (Coase (1937), Williamson (1975), Klein et al. (1978)) - TAC attributes: asset specificity, uncertainty, compleity and frequency - comple environment, bounded rationality, etc. incomplete contracts - incomplete contract + relationship specific investment lock-in situation inefficiency! - hold up problem (Nash bargaining) under-investment Vertical Integration is chosen if savings from avoiding high TAC of writing an (incomplete) contract and the hold-up problem eceed further costs of internal organization. -9-

10 Empirical Literature Large number of empirical analysis eplain firms motivation to chose a certain organizational structure (Klein, 2004). First empirical studies: - Monteverde and Teece (1982): Backward integration in the US automobile industry - Masten (1984): Aerospace industry - Joskow (1985): Coal procurement for power plants in the US - Klein (1988): Fisher Body and General Motors We distinguish: - Qualitative case studies (e.g. Dahl et al., 1998) - Quantitative case studies focusing on a single firm or industry (e.g. Saussier, 2000) - Cross sectional studies focusing on multiple firms or industries (e.g. Ohanian, 1994) Most based on transaction cost economics, we are only aware of a small number of studies using another background like the property rights theory view. -10-

11 Application to the LNG Industry Choice of Transaction Cost Economics because: - Transactions have certain attributes, which can be used to measure TAC - TCE has proved to be able to test determinants of VI, we can build on eisting empirical studies LNG industry under transaction cost view: - Asset specific investments in LNG infrastructure: well & liquefaction project: physical asset specificity, site specificity vessels: dedicated asset specificity if capacity committed, changing structure! regasification project: decreasing physical asset specificity - Comple environment: large number of parties involved, large number of contracts needed inter-country relationships comple technologies, - Many uncertainties: development of prices political risk, governmental regulations natural gas reserves mostly in countries with high political risk, - costly (or even impossible) to write complete contracts resulting incomplete contracts - investing parties face risk of hold-up can lead to under-investment - incomplete contracts + asset specific investments lead to inefficiency! - motivation to integrate vertically -11-

12 Agenda 1. Introduction 2. Literature Survey & Application to the LNG Industry 3. Data, Methodology and Results 4. Conclusions References -12-

13 Data Dataset: - detailed information about 85 LNG eport and import projects worldwide and LNG world fleet datasets (162 Atlantic-, 109 Pacific Basin): VI of a player along an actual value chain Eample BG deliveries from Egypt to Italy: WDDM (Saphire Field): operator with 50% interest. Egypt/Idku: Train II from 2006, 38% interest, entire output to BG. 8 vessels, 7 ordered, of which 2 planned for this route. Italy/Brindisi: start up 2007, operator with 50% interest. 40% capacity ownership of Brindisi terminal (2.4 mtpa). Eample of total vertical integration along all stages of the LNG value chain. -13-

14 Definition of the Variables Dependent Variable: degree of vertical integration VI i * n = N with n number of successive stages in which a certain player is active in series i N number of total stages Normalization to VI, being equally distributed between 0 and 1. Independent Variables: transaction cost proies, industry- and firm characteristics Proy for Proy Denotation Epected Sign Asset Specificity Dummy eport project (high specificity) DX + Uncertainty of a Project Political country risk (ordinal ranking) RISK + Transaction Frequency Firm s participation in projects (standardized) CAPOWN + Small Number Bargaining Market concentration inde (HHI) HHI + Industry Characteristics Dummy start up before 2002 Dummy project situated in Atlantic Basin Firm Characteristics Dummy state owned entity Firm size (assets in million USD, standardized) D2002 ATLANTIC ST ASSETS

15 Econometric Model and Results Tobit Regression Analysis world LNG value chains: VI i = α + β 1DX + β 2 RISK + β 3CAPOWN + β 4 HHI _ IM + β 5 D 2002 β ST + β ASSETS + β ATLANTIC + ε i + Results standard Tobit regression (total dataset; 271 observations): Regression Results Descriptive Statistics (Original Data) Coeff. Std. Error z-stat. Prob. Mean Min Ma [Unit] C DX RISK CAPOWN [mtpa] HHI D ST ASSETS , ,177 [mn USD] ATLANTIC

16 Focus on the Atlantic Basin Analysis LNG value chains in the Atlantic Basin: VI i = α + β 1DX + β 2 RISK + β 3CAPOWN + β 4 HHI _ IM + β 5 D 2002 β EUR + β ST + β ASSETS + ε i + Results standard Tobit regression (Atlantic Basin dataset; 162 observations): Regression Results Descriptive Statistics (Original Data) Coeff. Std. Error z-stat. Prob. Mean Min Ma [Unit] C DX RISK CAPOWN [mtpa] HHI D EUR ST ASSETS , ,256 [mn USD] -16-

17 Agenda 1. Introduction 2. Literature Survey & Application to the LNG Industry 3. Data, Methodology and Results 4. Conclusions References -17-

18 Conclusions - large investments in natural gas (LNG) infrastructure will be necessary - long-term contracts (in combination with short-term contracts) will still be used, AND: - global players follow a strategy of vertical integration (worldwide) and strategic partnerships What are firms incentives to integrate vertically in the LNG industry? With increasing TAC the degree of vertical integration increases. The likelihood of VI for Atlantic Basin value chains eceeds the Pacific Basin ones. The degree of VI in European value chains eceeds the one of North American value chains. - global super majors (large firms, especially oil and gas majors) dominate the industry - difficult situation for new entrants - in contrast to Continental Europe s liberalization efforts! -18-

19 Thank you very much for your attention! Any Questions or Comments? Contact: Dresden University of Technology Chair of Energy Economics and Public Sector Management -19-

20 Agenda 1. Introduction 2. Literature Survey & Application to the LNG Industry 3. Data, Methodology and Results 4. Conclusion References -20-

21 References (selected) Acemoglu, Daron, Aghion, Philippe, Griffith, Rachel, and Fabrizio Zilibotti (2005): Vertical Integration and Technology: Theory & Evidence.??? Cedigaz (2004): LNG Trade and Infrastructures. Coase, Ronald H. (1937): The Nature of the Firm. Dahl, Carol A., and Thomas K. Matson (1998): Evolution of the US Natural Gas Industry in Response to Changes in Transaction Costs. In: Land Economics, Vol. 74, No. 3, EIA (2003): The Global LNG Market Status and Outlook. IEA (2005): World Energy Outlook. Paris: OECD Joskow, Paul L. (1985): Vertical Integration and Long Term Contracts: The Case of Coal-Burning Electric Generation Plants. Journal of Law, Economics, and Organization, Vol. 1, No. 1, pp Joskow, Paul L. (2003): Vertical Integration. In: Handbook of New Institutional Economics, Kluwer. Klein, Benjamin (1988): Vertical Integration as Organizational Ownership: The Fisher Body General Motors Relationship Revisited. Journal of Law, Economics and Organization, Vol. 4, No. 1, pp Klein, Peter G. (2004): The Make-or-Buy Decision: Lessons from Empirical Studies. Contracting and Organizations Research Institute, University of Missouri Columbia, Working Paper No Masten, Scott (1984): The Organization of Production: Evidence from the Aerospace Industry. Journal of Law and Economics, Vol. 27, pp Monteverde, Kirk, and David J. Teece (1982): Appropriable Rents and Quasi-Vertical Integration. Journal of Law and Economics, Vol. 25, pp Nissen, David (2004): Commercial LNG: Structure and Implications. Paper presented at XIV Repsol YPF Seminar, Managing Energy Markets, La Coruna, Ohanian, Nancy K. (1994): Vertical Integration in the US Pulp and Paper Industry, The Review of Economics and Statistics. Rosés, Joan R. (2005): Subcontracting and Vertical Integration in the Spanish Cotton Industry. Department of Economic History and Institutions, Universidad Carlos III de Madrid. Saussier, Stéphane (2000): Transaction Costs and Contractual Incompleteness: The Case of Electricité de France. Journal of Economic Behavior and Organization, Vol. 42, No. 2, pp Williamson, Oliver E. (1971): The Vertical Integration of Production: Market Failure Considerations. American Economic Review, Vol. 61, No. 2, pp