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

Amina Baba, Anna Creti () and Olivier Massol
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Amina Baba: Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Anna Creti: Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, LEDA-CGEMP - Centre de Géopolitique de l’Energie et des Matières Premières - LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris

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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; destination flexibility option; volatility; TVAR; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-ene and nep-sea
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Related works:
Journal Article: What can be learned from the free destination option in the LNG imbroglio? (2020)
Working Paper: What can be learned from the free destination option in the LNG imbroglio? (2020)
Working Paper: What can be learned from the free destination option in the LNG imbroglio ? (2020)
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