Global LNG Contract Terms and Revisions An Empirical Analysis

Transcription

1 Global LNG Contract Terms and Revisions An Empirical Analysis Mark Agerton Graduate Fellow Center for Energy Studies, Rice University IAEE International Conference, June 17, 214

2 Research question I How is LNG priced under long-term contracts (LTC)? Pricing terms are not public Rules of thumb? JKM spot price? Mark Agerton 2 / 31

3 How to infer characteristics of LTC terms? I Exploit public customs data Importer + Exporter Total volume + value I Characterize statistical relationship I Understand LTC pricing terms better I Overcome econometric issues Cointegration Unknown structural breaks Mark Agerton 3 / 31

4 Why focus on JKST, and Japan especially? 25 2 million metric tons 15 1 Others Taiwan Spain Korea Japan Source: Petroleum Economist Mark Agerton 4 / 31

5 Asian markets are tight Atlantic Pacific 15 million metric tons 1 5 LTC Actual Total Source: GIIGNL and author's calculations Mark Agerton 5 / 31

6 Customs data capture LTC, not spot cargoes Atlantic Pacific 15 million metric tons 1 5 Actual Total Spot + ST Source: GIIGNL and author's calculations Mark Agerton 6 / 31

7 What do LTC pricing formulas look like? I Alaskan LNG export license I Oil benchmark I S-curve I Regimes j = 1,...,m + 1 LNG Oil p+1 X y t = c j + j jr z t r + u t t = T j 1 + 1,...,T j r= Mark Agerton 7 / 31

8 Why worry about structural breaks? I Renegotiation clauses (Weems, 26) I Changing value of LNG Substitutes Supply and demand shocks I S-curves =) nonlinearities I Heterogeneity in underlying contracts Mark Agerton 8 / 31

9 DOLS with structural breaks p+1 X y t = c j + j r= jrz t r + u t m px y t = c j + jz t + js z t s + u t s= I Dynamic OLS I Minimize SSR I UD max, sup Wald and SEQ(k k + 1) I Bai and Perron (1998, 23); Kejriwal and Perron (28b, 21) Mark Agerton 9 / 31

10 Breaks in the LNG oil relationship Country of origin Indonesia Qatar Nigeria Algeria Oman Qatar Indonesia USA UAE Brunei Malaysia Australia Qatar Breaks in time or s-curve kinks? Taiwan Spain Korea Japan Fukushima? Elimination of s-curves is contract revision Mark Agerton 1 / 31

11 Breaks in the LNG oil relationship Country of origin Indonesia Qatar Nigeria Algeria Oman Qatar Indonesia USA UAE Brunei Malaysia Australia Qatar Breaks in time or s-curve kinks? Taiwan Spain Korea Japan Fukushima? Elimination of s-curves is contract revision Mark Agerton 1 / 31

12 Breaks in the LNG oil relationship Country of origin Indonesia Qatar Nigeria Algeria Oman Qatar Indonesia USA UAE Brunei Malaysia Australia Qatar Breaks in time or s-curve kinks? Taiwan Spain Korea Japan Fukushima? Elimination of s-curves is contract revision Mark Agerton 1 / 31

13 Breaks in the LNG oil relationship Country of origin Indonesia Qatar Nigeria Algeria Oman Qatar Indonesia USA UAE Brunei Malaysia Australia Qatar Breaks in time or s-curve kinks? Taiwan Spain Korea Japan Fukushima? Elimination of s-curves is contract revision Mark Agerton 1 / 31

14 Breaks in the LNG oil relationship Country of origin Indonesia Qatar Nigeria Algeria Oman Qatar Indonesia USA UAE Brunei Malaysia Australia Qatar Breaks in time or s-curve kinks? Taiwan Spain Korea Japan Fukushima? Elimination of s-curves is contract revision Mark Agerton 1 / 31

15 Japan: LNG vs oil prices 2 USA Indonesia Malaysia Brunei LNG 2 15 Australia UAE Qatar Regime Oil Mark Agerton 11 / 31

16 Focusing in on two series 2 Indonesia Malaysia 15 Regime 4 LNG Oil Mark Agerton 12 / 31

17 Japanese contract revisions I S-curve kinks? 2: USA, Brunei, Malaysia ($25 26) early 24: Qatar ($31) late 24: Indonesia, UAE ($4) I Eliminate S-curves? 27 (Qatar, Malaysia, Brunei) 29 (UAE, maybe Australia) Asian imports exceed LTC and High oil prices 27 present I Shifts up in I Fukushima only Indonesian revisions Mark Agerton 13 / 31

18 Other countries: LNG vs oil prices LNG Korea Qatar Korea Oman Taiwan Indonesia Spain Qatar Spain Algeria Spain Nigeria Regime Oil Mark Agerton 14 / 31

19 S. Korea, Taiwan, Spain I Fewer and smaller revisions I No S-curves I Slopes South Korea and Taiwan: approximately.17 1/5.8 Spain: similar to S-curve tail (.6.1) Mark Agerton 15 / 31

20 Findings I Japan S-curves to reduce risk Abandoned: rising oil prices, tight market Fukushima: LTCs as insurance? Poorer fit in recent years I South Korea and Taiwan No S-curves Smaller countries, fewer firms and revisions I Spain More substitutes and weaker indexation Fewer revisions, no S-curves Mark Agerton 16 / 31

21 Conclusion I Pricing with oil-indexation, not JKM I Heterogeneity and revisions in pricing, not rules-of-thumb I Must account for structural breaks Mark Agerton 17 / 31

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23 Japan Estimates I Japan Malaysia Japan Brunei Japan USA Start 1988(5) 2(3) 27(4) 29(1) 1988(8) 2(5) 27(11) 21(5) 1988(4) 1991(4) 1999(12) 26(1) 29(4) End 2(2) 27(3) 29(9) 214(2) 2(4) 27(1) 21(4) 214(2) 1991(3) 1999(11) 25(12) 29(3) 211(3) c (.118) (.41) (.596) (.256) (.127) (.93) (.895) (.686) (.13) (.173) (.59) (.59) (.238) (.6) (.1) (.7) (.2) (.7) (.2) (.11) (.6) (.7) (.1) (.2) (.1) (.3) (.137) (.118) (.26) (.55) (.142) (.343) (.266) (.145) (.212) (.225) (.119) (.62) (.64) (.273) (.186) (.449) (.85) (.282) (.532) (.47) (.24) (.472) (.385) (.188) (.116) (.87) (.36) (.196) (.44) (.85) (.318) (.559) (.443) (.253) (.483) (.368) (.19) (.12) (.88) (.275) (.199) (.497) (.79) (.325) (.57) (.57) (.251) (.222) (.24) (.122) (.58) (.65) (.133) (.124) (.256) (.51) (.325) (.57) (.52) (.251) (.322) (.57) (.421) (.255) (.292) (.567) (.454) (.243) (.151) (.374) (.232) (.141) T ˆi ˆLR,i ˆ i ˆ ˆLR ˆ D-Fuller p <.1, p <.1, p <.5 Mark Agerton 19 / 31

24 Japan Estimates II Japan Qatar Japan Australia Japan UAE Japan Indonesia Start 1997(1) 24(2) 27(4) 29(5) 212(1) 1989(8) 25(1) 29(1) 1993(6) 25(1) 29(3) 1988(4) 25(1) 211(4) End 24(1) 27(3) 29(4) 211(12) 214(2) 25(9) 28(12) 214(2) 24(12) 29(2) 214(2) 24(12) 211(3) 214(2) c (.129) (.258) (.34) (.397) (2.127) (.132) (.521) (.683) (.252) (.321) (.325) (.118) (.176) (2.519) (.6) (.5) (.4) (.5) (.19) (.6) (.7) (.7) (.11) (.4) (.3) (.5) (.2) (.22) (.174) (.229) (.85) (.144) (.99) (.36) (.27) (.247) (.442) (.179) (.97) (.159) (.94) (.15) (.298) (.346) (.162) (.28) (.145) (.546) (.412) (.387) (.719) (.344) (.148) (.288) (.176) (.169) (.37) (.373) (.16) (.213) (.158) (.573) (.483) (.382) (.756) (.348) (.148) (.293) (.175) (.17) (.36) (.395) (.172) (.217) (.155) (.555) (.51) (.36) (.754) (.35) (.146) (.167) (.99) (.19) (.311) (.43) (.163) (.198) (.149) (.319) (.39) (.195) (.46) (.187) (.83) (.34) (.39) (.163) (.23) (.14) (.178) (.255) (.86) (.117) (.99) T ˆi ˆLR,i ˆ i ˆ ˆLR ˆ D-Fuller p <.1, p <.1, p <.5 Mark Agerton 2 / 31

25 Estimates for others Korea Qatar Korea Oman Taiwan Indonesia Spain Qatar Spain Algeria Spain Nigeria Start 1999(9) 2(4) 2(1) 28(11) 23(4) 1995(1) 21(1) 2(2) 28(1) End 213(4) 213(4) 28(1) 213(3) 213(4) 21(9) 213(4) 27(12) 213(4) c (.16) (.147) (.119) (.278) (.253) (.13) (1.421) (.173) (.32) (.2) (.2) (.2) (.3) (.3) (.3) (.13) (.4) (.3) (.79) (.14) (.76) (.74) (.192) (.168) (.364) (.231) (.162) (.146) (.19) (.136) (.117) (.328) (.281) (.497) (.319) (.288) (.15) (.194) (.88) (.64) (.335) (.283) (.561) (.329) (.292) (.15) (.192) (.337) (.284) (.572) (.328) (.294) (.148) (.14) (.331) (.283) (.552) (.326) (.287) (.8) (.192) (.282) (.498) (.244) (.158) (.17) (.283) T ˆi ˆLR,i ˆ i ˆ ˆLR ˆ D-Fuller p <.1, p <.1, p <.5 Mark Agerton 21 / 31

26 Related literature 1) Energy market integration Process of price convergence... not discrete breaks No a-priori DGP De Vany and Walls (1993) Neumann and Cullmann (212); Neumann, Siliverstovs, and Hirschhausen (26) 2) Spot LTC interactions Theoretical Predict increasing flexibility Brito and Hartley (27) Ikonnikova et al. (29) Hartley (213) Mark Agerton 22 / 31

27 References I Andrews, Donald WK (1991). Heteroskedasticity and autocorrelation consistent covariance matrix estimation. In: Econometrica: Journal of the Econometric Society 59.3, pp Bai, Jushan and Pierre Perron (1998). Estimating and testing linear models with multiple structural changes. In: Econometrica 66.1, pp (23). Computation and analysis of multiple structural change models. In: Journal of Applied Econometrics 18.1, pp Brito, Dagobert L and Peter R Hartley (27). Expectations and the evolving world gas market. In: The Energy Journal, pp De Vany, Arthur and W. David Walls (1993). Pipeline Access and Market Integration in the Natural Gas Industry: Evidence from Cointegration Tests. In: The Energy Journal Hartley, Peter R (213). The Future of long-term LNG Contracts. Tech. rep. The James A. Baker III Institute for Public Policy, Rice University. Ikonnikova, Svetlana et al. (29). Strategic model of LNG arbitrage: analysis of LNG trade in Atlantic Basin. In: 32nd International Association for Energy Economics Conference Proceedings. Citeseer. Mark Agerton 23 / 31

28 References II Kejriwal, Mohitosh and Pierre Perron (28a). Data dependent rules for selection of the number of leads and lags in the dynamic OLS cointegrating regression. In: Econometric Theory 24.5, p (28b). The limit distribution of the estimates in cointegrated regression models with multiple structural changes. In: Journal of Econometrics 146.1, pp (21). Testing for multiple structural changes in cointegrated regression models. In: Journal of Business & Economic Statistics 28.4, pp Neumann, A and A Cullmann (212). What s the story with natural gas markets in Europe? Empirical evidence from spot trade data. In: European Energy Market (EEM), 212 9th International Conference on the. IEEE, pp Neumann, Anne, Boriss Siliverstovs, and Christian von Hirschhausen (26). Convergence of European spot market prices for natural gas? A real-time analysis of market integration using the Kalman Filter. In: Applied Economics Letters 13.11, pp Weems, Philip R (26). Evolution of long-term LNG sales contracts: Trends and issues. In: Oil, Gas & Energy Law Intelligence 4.1. Mark Agerton 24 / 31

29 Contracts analyzed Japan Taiwan Australia Brunei Indonesia Malaysia Qatar UAE USA Others Indonesia Others 4 Korea 2 Spain Source: GIIGNL Oman Qatar Others Algeria Nigeria Qatar Others Mark Agerton 25 / 31

30 Japan: mostly LTCs million metric tons Australia Brunei Indonesia Malaysia Qatar UAE USA 1..5 Actual LT Actual Spot + ST LTC Source: GIIGNL and author's calculations Mark Agerton 26 / 31

31 Others: mostly LTCs Korea Oman Korea Qatar Taiwan Indonesia million metric tons Spain Algeria Spain Nigeria Spain Qatar Actual LT Actual Spot + ST LTC Source: GIIGNL and author's calculations Mark Agerton 27 / 31

32 Benchmark selection I Either Brent crude or Japanese Crude Cocktail (JCC) I Most statistically significant set of lags in X12 P LNG,t = + k= X12 Brent,kP Brent,t k + k= JCC,kP JCC,t k + u t I Japan: JCC I Others: Brent Mark Agerton 28 / 31

33 Lag selection I DOLS model X y t = c + z t + s z t s + u t p s= I Use BIC to detmine p (Kejriwal and Perron, 28a) Mark Agerton 29 / 31

34 The sup Wald test I Test for k breaks (Kejriwal and Perron, 28b, 21) F T (, k) = T (p + 3) (k + 1) k SSR SSR k SSR k I Break fractions 2 must be at least > apart i+1 i =(T i+1 T i )/T > I sup Wald just minimizes the SSR: arg max F T (, k) =arg min SSR Mark Agerton 3 / 31

35 Testing procedure I Recommended by Bai and Perron (23): 1) UD max = max k=1,...,m sup F T (, k) 2) SEQ(k k + 1) for null of k vs k + 1 breaks 3) sup Wald = sup 2 F T (, k) I Robust version is just scaling by long-run variance Scale by (ˆ2u/ˆ2) ˆ2 is a modified Andrews (1991) estimator (Kejriwal and Perron, 21) I Delta-method for variance of implied s Mark Agerton 31 / 31