Strategic Model of Lng Arbitrage: Analysis of Lng Trade in Atlantic Basin
نویسندگان
چکیده
We develop a two-stage model of the LNG market to determine the incentives to enter long-term contracts vs. spot trade and to understand the causes of new contract terms. First we study how LNG importers and exporters negotiate long-term supply contracts and make investments under demand uncertainty. Second we analyze spot trade when demand is known, capacities and long-term supplies are fixed. Importers with excess supply will resell to importers with higher than expected demand and compete with exporters if have the ”flexibility option” included in their contracts. We find that the appearance of the ”flexibility option” results from the value of investment cost and demand uncertainty level. We also establish the conditions for emergence of spot trade depending again on demand uncertainty and capital costs.
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