The global LNG market is still maturing with a number of different pricing and contract methods implemented globally. These range from gas-to-gas market hub pricing in the United States and the United Kingdom, oil product indexation in Continental Europe and crude oil indexation in the Asia-Pacific markets to heavily regulated markets in the Middle East. These different market structures have been further emphasised recently with the rising price of crude oil and recent findings of indigenous sources of Shale Gas in the United States widening the gap between respective international market prices. Inefficiencies are also caused by the large contractual commitments and associated clauses such as take-or-pay commitments.
This study applies a competitive equilibrium model to analyse the effects of two different market structures on historical LNG trade patterns for 2012. The first simulation maintains LNG quantity contractual obligations with a floating price. The second simulation removes all contractual obligations, creating a competitive market between suppliers and consumers.
Our findings suggest there are a large number of inefficient trade routes being used and prices generally fall below the levels realised in 2012. The current long-term contract quantities are also causing inefficiencies in the market and social welfare is maximised in the perfectly competitive setting.