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

Baba, A., Creti, A. and Massol, O. (2020). What can be learned from the free destination option in the LNG imbroglio?. Energy Economics, doi: 10.1016/j.eneco.2020.104764

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.

Publication Type: Article
Additional Information: © 2020. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: LNG arbitrage, Destination flexibility option, Volatility, TVAR, Monte Carlo simulation
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Departments: School of Arts & Social Sciences > Economics
Date Deposited: 21 May 2020 15:00
URI: https://openaccess.city.ac.uk/id/eprint/24225
[img] Text - Accepted Version
This document is not freely accessible until 14 May 2022 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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