Scandinavian Working Papers in Economics

UiS Working Papers in Economics and Finance,
University of Stavanger

No 2015/4: Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price

Frank Asche (), Petter Osmundsen () and Atle Oglend ()
Additional contact information
Frank Asche: UiS, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Petter Osmundsen: UiS, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Atle Oglend: UiS, Postal: University of Stavanger, NO-4036 Stavanger, Norway

Abstract: This paper investigates the economic value of trade when prices of transportation services are endogenous to cross-market price spreads. This is relevant for liquefied natural gas (LNG) exports. LNG transportation capacity is limited in the short-run, and long lead-times are involved in extending the transportation infrastructure. We establish empirically that LNG transportation costs have been endogenous to regional gas prices spreads. As such, transportation service providers have been able to capture part of the price spread. We proceed to develop a method to value LNG exports under conditions of endogenous transportation costs and market integration. We use this method to quantify the effect of endogenous transportation costs on the value of LNG exports from the US to Japan. Our analysis shows that when transportation costs are correctly treated as endogenous, the LNG export benefit can drop by as much as 20-50% relative to the case of exogenous cost.

Keywords: Oil; natural gas; peak load pricing; regime switching; price dynamics

JEL-codes: F13; Q27; Q48

20 pages, February 9, 2015

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uis_wps_2015_04_asche_oglend_osmundsen.pdf PDF-file

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