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What can be learned from the free destination option in the LNG imbroglio?

Amina Baba, Anna Cretti and Olivier Massol

Working Papers from Chaire Economie du climat

Abstract: We examine the profitability of flexible routing by LNG cargoes for a single supplier taking into account uncertainty in the medium-term dynamics of gas markets. First, we model the trajectory of natural gas prices in Asia, Northern America, and Europe using a Threshold Vector AutoRegression representation (TVAR) in which the system’s dynamics switches back and forth between high and low regimes of oil price volatility. We then use the generalized impulse response functions (GIRF) obtained from the estimated threshold model to analyze the effects of volatility shocks on the regional gas markets dynamics. Lastly, the valuation of destination flexibility in LNG supplies is conducted using a real option approach. We generate a sample of possible future regional price trajectories using Monte Carlo simulations of our empirical model and determine for each trajectory the optimal shipping decisions and their profitability. Our results portend a substantial source of profit for the industry and reveal future movements of vessels. We discuss the conditional impact of destination flexibility on the globalization of natural gas markets.

Keywords: LNG arbitrage; Volatility; TVAR; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: C15 C32 M31 Q40 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-ore
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http://www.chaireeconomieduclimat.org/RePEc/cec/wp ... ba-Cretti-Massol.pdf First version, 2020 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cec:wpaper:2004

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