Natural gas prices, LNG transport costs, and the dynamics of LNG imports

Maxwell, Don; Zhu, Zhen

Natural gas prices, LNG transport costs, and the dynamics of LNG imports

2011

Maxwell, Don | Zhu, Zhen

According to the U.S. Energy Information Administration, LNG is projected to become a much larger share of U.S. natural gas consumption, rising from current levels of around 2.5% of total natural gas consumption to 12.4% by 2030. Because natural gas and LNG are substitutes, natural gas prices are expected to be an important determinant of LNG imports. Furthermore, an increasing share of LNG is traded under short-term contracts with spot shipments being diverted to markets offering the highest returns (netbacks). Relative natural gas prices as well as LNG transportation costs are important determinants of LNG netbacks. This paper examines the empirical relationship between U.S. LNG imports, the Henry Hub price of natural gas relative to U.K. and Asia gas prices, and a proxy for LNG transportation costs using monthly data from 1997 to 2007. Granger causality tests, error variance decomposition, and impulse response analyses using a VAR model are employed to establish Granger-causality as well as the dynamics of natural gas prices and LNG transportation innovations on LNG imports.

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