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

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Date
2020
Dewey
Théorie économique
Sujet
LNG arbitrage; Destination flexibility option; Volatility; TVAR; Monte Carlo simulation
JEL code
Q.Q4.Q40; M.M3.M31; C.C1.C15; C.C3.C32
Journal issue
Energy Economics
Volume
Volume 89
Number
June 2020
Publication date
06-2020
Article pages
104764
Publisher
IPC Science and Technology Press
DOI
http://dx.doi.org/10.1016/j.eneco.2020.104764
URI
https://basepub.dauphine.fr/handle/123456789/21608
Collections
  • LEDa : Publications
Metadata
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Author
Baba, Amina-Feriel
163511 Laboratoire d'Economie de Dauphine [LEDa]
Creti, Anna
163511 Laboratoire d'Economie de Dauphine [LEDa]
Massol, Olivier
95291 Department of Economics, University College London
Type
Article accepté pour publication ou publié
Abstract (EN)
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.

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