37th IAEE International Conference, New YorkJune, 15-18, 2014

LNG Pricing Differences across the Atlantic -

a Comparison between the United States and Europe

Virginie KroneMicaela Ponce

Anne Neumann

Universität Potsdam

- 2 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants of LNG Prices

3. Methodology

4. Data

5. Results

6. Conclusion

- 3 -IAEE - June 17th, 2014

How does the IEA see the future?

Natural gas demand projections to 2035

Source: IEA WEO 2013

European Union natural gas supply and demand balance China natural gas supply and demand balance

- 4 -IAEE - June 17th, 2014

How does the EIA see the future?

World energy consumption by fuel type 1990-2040

World natural gas consumption

by economic sector World electricity generation by energy

source

Source: EIA, International Energy Outlook 2013

- 5 -IAEE - June 17th, 2014

Research Question

1. Which factors determine LNG import prices in the different world regions?

2. How do determinants affect regional LNG import prices?

3. Can price differences be explained by the impact of the determinants on LNG import

prices?

LNG Landed Prices as of Oct.2013, Source: FERC, 2013

- 6 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants

3. Methodology

4. Data

5. Results

6. Conclusion

- 7 -IAEE - June 17th, 2014

Determinants of LNG Import Prices

Fundamental Factors Financial Market Factors

Supply Spot prices

Domestic production - Natural gas

Number of market suppliers - Crude oil

Storage capacity and levels Futures

Available resources External Factors

Demand Events of political nature

LNG consumption Acts of nature

Import capacity Temperature

CO2 price

Economic growth

Main differences in price determinants:

•Price mechanisms

•Political and environmental factors

•Imports dependency

•Liquidity spot markets

Sources: Brown and Yucel(2008), Hamilton (2003)and (2008),

Breitenfellner et al. (2009), ECB (2008), OECD (2004).

- 8 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants

3. Methodology

4. Data

5. Results

6. Conclusion

- 9 -IAEE - June 17th, 2014

Vector Autoregression (VAR)

- 10 -IAEE - June 17th, 2014

Structural Vector Autoregression (SVAR)

Σ+

=

⋅

−

−

−

−

−

−

−

cons

t

ipi

t

oil

t

sp

t

price

t

prod

t

hdd

t

t

t

t

t

t

t

t

t

t

cons

ipi

oil

sp

price

prod

hdd

A

cons

ipi

oil

sp

price

prod

hdd

aaaaa

aaaa

a

aaaa

aaaaa

aaaa

ε

ε

ε

ε

ε

ε

ε

2/1

2/1

2/1

2/1

2/1

2/1

2/1

7574737271

65646361

51

47454342

3735343231

25242321

10

010

001000

010

01

001

0000001

- 11 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants

3. Methodology

4. Data

5. Results

6. Conclusion

- 12 -IAEE - June 17th, 2014

Implemented Data

- 13 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants

3. Methodology

4. Data

5. Results

6. Conclusion

- 14 -IAEE - June 17th, 2014

-.005

0

.005

.01

0 5 10 15

months

EU Domestic Production Shock

-.005

0

.005

.01

.015

0 5 10 15

months

EU Temperature Shock

Impulse Response Analysis I

-.02

0

.02

.04

0 5 10 15

months

US Temperature Shock

-.04

-.02

0

.02

0 5 10 15

months

US Domestic Production Shock

- 15 -IAEE - June 17th, 2014

0

.005

.01

.015

0 5 10 15

months

EU Industrial Production Shock

-.005

0

.005

0 5 10 15

months

EU Demand Shock

Impulse Response Analysis II

-.02

0

.02

.04

0 5 10 15

months

US Industrial Production Shock

-.02

-.01

0

.01

0 5 10 15

months

US Demand Shock

- 16 -IAEE - June 17th, 2014

-.04

-.02

0

.02

.04

0 5 10 15

months

WTI Oil Price Shock

-.05

0

.05

.1

0 5 10 15

months

Henry Hub Price Shock

-.01

-.005

0

.005

0 5 10 15

months

Brent Price Shock

0

.005

.01

.015

.02

0 5 10 15

months

EU Spot Prices Shock

Impulse Response Analysis III

- 17 -IAEE - June 17th, 2014

Outline

1. Motivation

2. Determinants

3. Methodology

4. Data

5. Results

6. Conclusion

- 18 -IAEE - June 17th, 2014

Conclusions

How do determinants affect regional LNG import prices?

•EU absorbs demand/supply shocks quicker

•US absorbs spot price shocks quicker

�Largest responses:

•US: changes in natural gas spot price

•EU: Demand / natural gas spot price

Can price differences be explained by the impact of the determinants on LNG import

prices?

•Only partially

� Further research needed:

•Include political aspects, storage levels, CO2 prices, etc.

•Long run SVAR

•Modelling of different price mechanisms

- 19 -IAEE - June 17th, 2014

THANK YOU FOR YOUR INTEREST!

QUESTIONS? SUGGESTIONS?

mponce@uni-potsdam.de

Universität Potsdam

August-Bebel-Str. 89

14482 Potsdam, Germany

- 20 -IAEE - June 17th, 2014

Selected References

Breitenfellner, A., J. C. Cuaresma, and C. Keppel (2009). Determinants of Crude Oil Prices: Supply, Demand, Cartel or Speculation? Monetary Policy &

The Economy Q4, 111–136.

Brown, S. P. A. and Yucel, M. K. (2008). What Drives Natural Gas Prices? The Energy Journal, 29(2):45 - 60.

ECB (2008). Assessing the Factors Behind Oil Price Changes. Technical report, European Central Bank, Working Paper Series No. 855.

Hamilton, J. (2003). What Is an Oil Shock? Journal of Econometrics, 113(2), 363–98.

Hamilton, J. D. (2008). Understanding Crude Oil Prices. NBER Working Paper Series, National Bureau of Economic Research (14492).

Hartley, P. R., Medlock, K. B. III (2014). The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate. The Energy Journal,

35(2):25-44.

Hartley, P. R., Medlock, K. B. III, and Rosthal, J. E. (2008). The Relationship of Natural Gas to Oil Prices. The Energy Journal, 29(3):47 - 66.

Kilian, L. (2009). Not all Oil Price Shocks are alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review,

99(3):10 53- 69.

Lütkepohl, H. (2004). New Introduction to Multiple Time Series Analysis. Springer.

Lütkepohl, H. (2011). Vector Autoregressive Models. European University Institute WP ECO (30): 1 – 28.

Maxwell, D. and Zhu, Z. (2011). Natural Gas Prices, LNG Transport Costs, and the Dynamics of LNG imports. Energy Economics, 33(2):217 - 226.

OECD (2004). Oil Price Developments: Drivers, Economic Consequences and Policy Responses. Technical report, Organisation for Economic Co-operation

and Development, Economics Department,Working Papers No. 412.

OECD/IEA (2013). World Energy Outlook 2013. Technical Report, International Energy Agency, Paris, France.

Sims (1980). Macroeconomics and Reality. Econometrica, 48: 173 - 220.

StataCorp (2011). Time Series Reference Manual. In Stata Quick Reference and Index, Release 12.

Stock, J. H. and M. W. Watson (2001). Vector Autoregressions. Journal of Economic Perspectives 15(4):101 – 115.

Villar, J. A. and F. L. Joutz (2006). The Relationship Between Crude Oil and Natural Gas Prices. Energy Information Administration, Office of Oil and Gas, 1

– 43.