Long-Term Contracts for Natural Gas - An Empirical Analysis. Anne Neumann and Christian von Hirschhausen

Transcription

1 Globalization of Natural Gas Markets Working Papers WP-GG-13a Long-Term Contracts for Natural Gas - An Empirical Analysis Anne Neumann and Christian von Hirschhausen Reprint from Presentation at the 7 th IAEE European Energy Conference, Bergen (Norway), August 2005 and the 9 th ISNIE Conference, Barcelona (Spain), September 2005 German Institute for Economic Research Chair of Energy Economics and Public Sector Management Dresden University of Technology

2 Long-Term Contracts for Natural Gas Supply An Empirical Analysis Anne Neumann Technische Universität Dresden DREWAG-Stiftungslehrstuhl EnErgiewirtschaft / EnergyEconomics -1-

3 Agenda 1. Motivation 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Conclusions Literature -2-

4 1. Motivation - Development of long-term contracts in liberalized markets with a focus on transaction cost - First empirical qualitative evidence on Europe - Change of institutional framework, market environment, and growing importance of natural gas in the fuel mix Impact on traditional European importing contracts? 400 Other UK Netherlands Algeria LNG Russia Norway European gas imports contracted volume (in bcm)

5 Agenda 1. Introduction 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Conclusions Literature -4-

6 2.1 Literature (theoretical) Transaction cost economics and agency theory: - Long-term contracts minimize transaction cost when significant specific assets are required - Overcome the hold-up problem without vertical integration (Klein, Crawford, and Alchian, 1978, Williamson, 1979) - Asset-specificity, uncertainty, opportunism, bounded rationailty (Williamson, 1975, 1985) - Sufficient investment incentives and inexpensive ex- post renegotiation Incomplete contracts: - Reduce inefficiencies in ex- ante investments or ex-post exchange (Grossmann / Hart, 1986, Hart / Moore, 1988) -5-

7 2.2 Literature (empirical) - Work by Joskow (1987) on contract duration and asset-specificity in American coal industry - Masten / Crocker (1985) and Crocker / Masten (1988) focus on the US natural gas industry, contractual take-obligations relate negatively with contract duration - Influence of US governmental regulation on long-term contracts in natural gas sector (Mulherin, 1986, Hubbard / Weiner, 1986, Doane / Spulber, 1994) - Increasing use of spot transactions in LNG industry (Hartley / Brito, 2002) Hypothesis: Decreasing asset-specificity due to changing nature of the market (given the impact of number of players, capital cost, economic life-time etc.) -6-

8 Agenda 1. Introduction 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Conclusions Literature -7-

9 3.1 Cost Reduction in the LNG Chain $/MBtu Regasification 3 Regasification Shipping 2.5 Shipping Liquefaction Liquefaction 0.5 Upstream Upstream 0 Early 1990's Early 2000 Decreasing capital intensity and decreasing asset-specificity Source: Jensen (2004), IEA (2004), EIA (2003) -8-

10 3.2 Maturity of Spot Markets 200 bcm Total Imports Share of LNG share in % Increasing share of short term LNG trades in European imports Jul-01 Sep-01 Nov-01 Jan-02 M ar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 M ar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 M ar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 M ar-05 May-05 m illion therm s p er month Daily traded volumes at NBP Spot market liquidity enhances short-term trade and reduces uncertainty Source: Cedigaz (2004), IEA (2005), BP (several issues), Heren Ltd. -9-

11 3.3 Market Participants 3rd Benchmarking Report Increasing number of market participants Source: Third Benchmarking Report (European Commission) -10-

12 3.4 Yearly Contracted Volumes (Europe) Number of contracts Series: YVOL Sample Observations 132 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Yearly contracted volumes (in bcm) Higher contracted volumes linked to longer contract duration -11-

13 Agenda 1. Introduction 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Conclusions Literature -12-

14 4.1 Data Sample Size Number of contracts All contracts Number of contracts Series: CD Sample Observations Contract duration (in years) Series: CD Sample Observations 252 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Contract duration (in years) Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability European contracts -13-

15 4.2 Data - Year of Signature Number of contracts Year of signature European contracts Series: YOS Sample Observations 252 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Number of contracts All contracts Series: YOS Sample Observations 132 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Year of signature -14-

16 4.3 Sample Visualization CD 20 YVOL YOS CD Diminishing contract duration over time Positive relation between contract duration and yearly contracted volumes -15-

17 Agenda 1. Introduction 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Results Literature -16-

18 Variables and Summary Statistics - Own dataset, 317 contracts - Information on date of contract signature, time period of delivery, yearly or total contracted volume - Sample truncation OLS standard procedure will produce biased estimation (Maddala, 1983; Masten / Saussier, 2005; Sykuta, 2005) - We use 2SLS and Maximum Likelihood methodology - Seperate analysis of ALL and EUROPEAN contracts ALL Europe ALL Europe Obs TRAD Contract Duration (CD) PROJECT Mean EUROPA Max EURASIA Min 2 2 AFRICA Contracted Annual Volume (YVol) MIDDLE EAST Mean OCEANIA 76 Max AMERICAS 10 Min OTHERS 3-17-

19 Specification Analogous to Joskow (1987) (1) Contract Duration i = c i + β 1 YoS i + β 2 YVol i + β 3 PROJECT i + β 4 SPOT i + β 5 TRAD i + β 6 LEG i + β 7 ORIGIN i + ε i (2) Contract Duration i = c i + β 1 log(yos i ) + β 2 log(yvol i ) + β 3 PROJECT i + β 4 SPOT i + β 5 TRAD i + β 6 PROJECT i + β 7 ORIGIN i + ε i (3) Log(Contract Duration i ) = c i + β 1 log(yos i ) + β 2 log(yvol i ) + β 3 PROJECT i + β 4 SPOT i + β 5 TRAD i + β 6 LEG i + β 7 ORIGIN i + ε i CD contract duration (years) YoS year of signature (year) YVol yearly contracted volume(in bcm) PROJECT contract concluded in greenfield infrastructure project and extension (LNG) (dummy) SPOT share of LNG Spot trade in worldwide LNG trade (percentage per year) TRAD traditional player vs. incumbent (dummy) LEG European Legislation (1998) (dummy) ORIGIN Europe, Eurasia, Africa, Americas, Middle East, Oceania (dummy) -18-

20 Results Europe (132 observations) 2SLS ML C 1305, 588*** 10185,96*** 630,286*** C 1316,035*** 10267,06*** 616,364*** 163, ,164 87, ;8& 1408, ,678 YOS -0,646*** 0, ,297*** 162,576-82,590*** 11,468 YOS -0,652*** 0, ,954*** 185,340-80,755*** 13,771 YVOL 0,904*** 2,830*** 0,176*** YVOL 0,925*** 2,916*** 0,174*** 0,169 0,493 0,035 0,217 0,565 0,040 PROJECT 6,799*** 1,195 6,282*** 1,167 0,373*** 0,065 PROJECT 6,981*** 1,424 6,528*** 1,393 0,382*** 0,122 AFRICA -1,769 1,380-1,806 1,364-0,157 0,116 AFRICA -2,099 1,733-2,194 1,709-0,177* 0,099 EUROPE -1,734 1,202-1,641 1,167-0,138 0,085 EUROPE -2,046 1,556-2,000 1,516-0,157 0,102 adj. R 2 0,450 0,481 0,405 adj. R 2 0,460 0,508 0,415 Log Likelihood -421, ,713-69,525 Positive relation between asset-specificity and contract duration Reported are estimated coefficients with respective standard errors ***, **,* indicate significance at 1%, 5%, and 10% level -19-

21 -20- Results All Contracts (252 observations) -110, , ,638 Log Likelihood 0,269 0,312 0,305 adj. R 2 0,264 0,305 0,324 adj. R 2 0,079 1,256 1,329 0,070 0,967 0,962 0,219*** 3,818*** 3,748*** MIDDLE EAST 0,207*** 3,570*** 3,491*** MIDDLE EAST 0,184 2,263 2,312 0,090 1,561 1,545 0,259 4,383* 4,445** AMERICAS 0,255*** 4,256*** 4,319*** AMERICAS 0,056 0,805 0,798 0,064 0,962 0,989-0,088-0,227-0,519 EUROPE -0,092-0,293-0,589 EUROPE 0,136 2,121 1,966 0,106 1,428 1,436-0,324** -4,301** -3,246* LEG -0,369*** -5,000*** -4,135*** LEG 0,054 0,842 0,868 0,052 0,732 0,727-0,122** -2,283*** -2,047** TRAD -0,129** -2,406*** -2,183*** TRAD 0,022 0,352 0,328 0,019 0,241 0,231 0,053** 0,836** 0,695** SPOT 0,063*** 1,003*** 0,897*** SPOT 0,062 0,787 0,795 0,049 0,798 0,813 0,176*** 2,907*** 2,809*** PROJECT 0,182*** 2,992*** 2,899*** PROJECT 0,026 0,359 0,154 0,020 0,310 0,149 0,107*** 1,877*** 0,807*** YVOL 0,105*** 1,822*** 0,789*** YVOL 16, ,761 0,112 13, ,748 0,102-57,545*** -985,531*** -0,489*** YOS -61,016*** -1038,044*** -0,521*** YOS 122, , ,714 99, , , ,979*** 7504,789*** 990,566*** C 466,339*** 7903,591*** 1055,165*** C ML SLS

22 Agenda 1. Introduction 2. Literature Survey 3. Main Drivers 4. Data 5. Model Specification and Results 6. Results Literature -21-

23 6. Conclusion - Contracts dedicated to infrastructure investment exhibit significantly longer durations prevailance / importance of LTC to secure efficient investments - Positive effects of EC Directive: shorter contract duration - Market developments enhance shorter term trading - Importing contracts with political unstable regions secured over long time spans -22-

24 Literature BP (several issues): Statistical Review of World Energy. Crocker, Keith J., and Scott E. Masten (1988): Mitigating Contractual Hazards: Unilateral Options and Contract Length. RAND Journal of Economics, Vol.19, No.3, Czernie, Wilfried (2002): Security of Gas Supply and Long-Term Contracts. Paris, Presentation given at the International Energy Agency Regulatory Forum, February 7-8. Doanẽ, Michael J., and Daniel F. Spulber (1994): Open Access and the Evolution of the US Spot Market for Natural Gas. Journal of Law and Economics, Vol. 27, Hartley, Peter R., and Dagobert L. Brito (2001): New Energy Technologies in the Natural Gas Sectors. Houston, Texas, The James A. Baker III Institute for Public Policy. Hubbard, R. Glenn, and Robert J. Weiner (1986): Regulation and long-term Contracting in US Natural Gas Markets. Journal of Industrial Economics, Vol. 25, No.1, International Energy Agency (2004): Security of Gas Supply in Open Markets LNG and Power at a Turning Point. Paris, OECD. International Energy Agency (2005): Natural Gas Information Paris, OECD. Joskow, Paul L. (1985): Vertical Integration and Long-term Contracts: The Case of Coal Burning Electric Generation Plants. The Journal of Law, Economics and Organization, Vol. 1, No. 1, Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian (1978): Vertical Integration, Apprpriate Rents, and the Competitive Contracting Process. Journal of Law and Economics, Vol. 28, No.2, MacAvoy, Paul W. (1962): Price Formation in Natural Gas Fields: A Study of Competition, Monopsony, and Regulation. Yale University Press, New Haven. Maddala, G.S. (1983): Limited-Dependent and Qualitative Variables in Econometrics. Cambridge, Cambridge University Press. Masten, Scott E. (1988): Minimum Bill Contracts: Theory and Policy. The Journal of Industrial Economics, Vol. 37, Masten, Scott E., and Keith J. Crocker (1985): Efficient Adaptation in Long-Term Contracts: Take-or-Pay Provisions for Natural Gas. American Economic Review, Vol.75, No.5, Masten, Scott E. and Stéphane Saussier (2002): Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting. In Broussseau, Eric, and Jean-Michel Glachant, Jean Michel (eds.) (2002): The Economics of Contracts. Theories and Applications. Cambridge, MA. Mulherin, J.Harold (1986): Complexity in Long-Term Contracts: An Analysis of Natural Gas Contract Provisions.. Journal of Law, Economics and Organization, Vol.2, No.1, Neuhoff, Karsten, and Christian von Hirschhausen (2004): Long-term Contracts for Gas Imports A Theoretical Perspective. Mimeo. Saussier, Stéphane (1998): When Incomplete Contract Theory meets Transaction Cost Economics: A Test on Contractual Choice. Paper presented at theisnie Coneference. Sykuta, Michael E. (2005): New Institutional Econometrics: The Case of Contracting and Organization Research. New Institutional Economics Working Papers, Vol.1, No.1. Williamson, Oliver E. (1975): Markets and Hierarchies. New York, Free Press. Williamson, Oliver E. (1979): Transaction-Cost Economics: The Governance of Contractual Relations. Journal of Law and Economics Vol. 22, Williamson, Oliver E. (1985): The Economic Institutions of Capitalism - Firms, Market, Relational Contracting. New York ; Free Press. -23-