Long-Term Contracts and Asset Specificity Revisited An Empirical Analysis of Producer-Importer Relations in the Natural Gas Industry

Transcription

1 Long-Term Contracts and Asset Specificity Revisited An Empirical Analysis of Producer-Importer Relations in the Natural Gas Industry Anne Neumann and Christian von Hirschhausen Dresden University of Technology Chair of Energy Economics and Public Sector Management 1 st Workshop on Energy Economics and Technology April 21, 2006, Dresden -1-

2 Agenda 1. The Issue 2. Structural Changes in the LNG Value Chain 3. Data 4. Model Specification and Results 5. Conclusions Literature -2-

3 1.1 The Issue - 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)

4 1.2 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) -4-

5 1.3 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 contract duration due to the changing nature of the market (given the impact of number of players, capital cost, economic life-time etc.) -5-

6 Agenda 1. The Issue 2. Structural Changes in the LNG Value Chain 3. Data 4. Model Specification and Results 5. Conclusions Literature -6-

7 2 Structural Changes in the International Natural Gas Industry - Cost reduction in the LNG value-added chain - Economies of scale in liquefaction - Lower costs for shipping - Economies of scale in regas - Diminishing asset specificity of investments - Formerly: field-specific contracts - Nowadays: infrastructure developed, less hold-up risk, more general country-focused contracts - More players on both sides (producers, traders, importers) - Development of spot markets and shorter-term trading - Increased number of market participants - Producers - Buyers Less need for long-term contracts to overcome the hold-up problem -7-

8 2.1 Cost Reduction in the LNG Chain $/MBtu Regasification 2.5 Shipping Liquefaction Upstream Early 1990's Early 2000 Source: Jensen (2004), IEA (2004), EIA (2003) -8-

9 Structural Changes in the International Natural Gas Industry - Cost reduction in the LNG value-added chain - Economies of scale in liquefaction - Lower costs for shipping - Economies of scale in regas - Diminishing asset specificity of investments - Formerly: field-specific contracts - Nowadays: infrastructure developed, less hold-up risk, more general country-focused contracts - More players on both sides (producers, traders, importers) - Development of spot markets and shorter-term trading - Increased number of market participants - Producers - Buyers Less need for long-term contracts to overcome the hold-up problem -9-

10 Structural Changes in the International Natural Gas Industry - Cost reduction in the LNG value-added chain - Economies of scale in liquefaction - Lower costs for shipping - Economies of scale in regas - Diminishing asset specificity of investments - Formerly: field-specific contracts - Nowadays: infrastructure developed, less hold-up risk, more general country-focused contracts - More players on both sides (producers, traders, importers) - Development of spot markets and shorter-term trading - Increased number of market participants - Producers - Buyers Less need for long-term contracts to overcome the hold-up problem -10-

11 2.2 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. -11-

12 Structural Changes in the International Natural Gas Industry - Cost reduction in the LNG value-added chain - Economies of scale in liquefaction - Lower costs for shipping - Economies of scale in regas - Diminishing asset specificity of investments - Formerly: field-specific contracts - Nowadays: infrastructure developed, less hold-up risk, more general country-focused contracts - More players on both sides (producers, traders, importers) - Development of spot markets and shorter-term trading - Increased number of market participants - Producers - Buyers Less need for long-term contracts to overcome the hold-up problem -12-

13 2.3 Market Participants 3rd Benchmarking Report Source: Third Benchmarking Report (European Commission) -13-

14 Structural Changes in the International Natural Gas Industry - Cost reduction in the LNG value-added chain - Economies of scale in liquefaction - Lower costs for shipping - Economies of scale in regas - Diminishing asset specificity of investments - Formerly: field-specific contracts - Nowadays: infrastructure developed, less hold-up risk, more general country-focused contracts - More players on both sides (producers, traders, importers) - Development of spot markets and shorter-term trading - Increased number of market participants - Producers - Buyers Less need for long-term contracts to overcome the hold-up problem -14-

15 Agenda 1. The Issue 2. Structural Changes in the LNG Value Chain 3. Data 4. Model Specification and Results 5. Conclusions Literature -15-

16 3.1 Data Sample Size Number of contracts All contracts Series: CD Sample Observations 262 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Number of contracts Series: CD Sample Observations 135 Contract duration (in years) Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability European contracts Contract duration (in years) -16-

17 3.2 Sample Visualization Contract duration Year of signature Diminishing contract duration over time Positive relation between contract duration and yearly contracted volumes -17-

18 Agenda 1. The Issue 2. Structural Changes in the LNG Value Chain 3. Data 4. Model Specification and Results 5. Conclusions Literature -18-

19 4.1 Summary Statistics - Own dataset, more than 300 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) - truncated regression model - Seperate analysis of ALL and EUROPEAN contracts signed betweeen 1980 and 2005 ALL Europe Obs Contract Duration (CD) Mean Max Min 2 2 Contracted Annual Volume (YVol) Mean Max Min

20 4.2 Specification Analogous to Joskow (1987) (1) Contract Duration i = c i + β 1 YVol i + β 2 Dummy( ) + β 3 Dummy( ) + β 4 PROJECT + β 5 TRAD + β 6 LNGDummy + β 7 Spot + ε i (2) Contract Duration i = c i + β 1 log(yvol i ) + β 2 Dummy( ) + β 3 Dummy( ) + β 4 PROJECT + β 5 TRAD + β 6 LNGDummy + β 7 Spot + ε i (2) Log(Contract Duration i ) = c i + β 1 log(yvol i ) + β 2 Dummy( ) + β 3 Dummy( ) + β 4 PROJECT + β 5 TRAD + β 6 LNGDummy + β 7 Spot + ε i CD contract duration (years) 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) LNGDummy identifies LNG-Contracts Dummy European Legislation) ASIA identifies Asian contracts -20-

21 4.3 Results Europe (135 observations) OLS Specification (1) (1) (2) (3) C YVOL D D PROJECT TRAD LNGDUMMY SPOT 20.90*** 0.95*** -5.08*** (0.0055) -9.21*** (0.0050) 5.34*** (0.0001) (0.4472) 0.96 (0.4228) (0.6939) 21.18*** 0.98*** -5.97*** (0.0012) -9.99* (0.0504) 5.97*** (0.7539) 0.99 (0.5159) (0.7738) Reported are estimated coefficients and p-values. ***, **,* indicate significance at 1%, 5%, and 10% level ML (0.9913) 3.12*** 3.84 (0.9975) (0.9993) 3.97*** (0.0020) (0.7714) 1.08 (0.4043) (0.7298) 2.54 (0.9995) 0.22*** 0.16 (1.0000) (1.0000) 0.28** (0.0115) (0.7125) 0.13 (0.1888) (0.8760) R Adj. R Positive relation between asset-specificity and contract duration -21-

22 4.4 Results All Contracts (263 observations) OLS Specification (1) (1) (2) (3) C YVOL D D PROJECT TRAD LNGDUMMY SPOT ASIA 19.66*** 0.84*** -3.85*** (0.0010) -9.43*** (0.0006) 3.06*** (0.0001) -2.05*** (0.100) 0.99 (0.3547) 0.46 (0.1278) 0.11 (0.9123) 19.10*** 0.84*** -3.36*** (0.0050) -9.36*** (0.0009) 2.53*** (0.0018) -1.66** (0.0478) 1.22 (0.3031) 0.54* (0.0919) 0.09 (0.9294) ML 17.15*** 2.09*** (0.9040) (0.3672) 2.77*** (0.0017) (0.2171) 1.94 (0.1023) 0.74 (0.4718) 1.57 (0.1719) 2.79*** 0.12*** (0.0001) (0.9124) (0.4324) 0.16*** (0.0134) (0.2796) 0.14* (0.0716) 0.05 (0.5293) 0.08 (0.3086) R Adj. R Positive relation between asset-specificity and contract duration -22-

23 Agenda 1. The Issue 2. Structural Changes in the LNG Value Chain 3. Data 4. Model Specification and Results 5. Conclusions Literature -23-

24 5. 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 -24-

25 Thank you very much for your attention. Anne Neumann and Christian von Hirschhausen -25-

26 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. -26-

27 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 -27-