Changing Contract Structures in the International Liquefied Natural Gas Market : a First Empirical Analysis
Abstract: This paper provides an empirical assessment of liquefied natural gas (LNG) supply contracts to determine optimal contract duration. We study the trade-off between contracting costs due to repeated bilateral bargaining versus flexibility. Estimation results of a simultaneous equation model show that the presence of high dedicated asset specificity results in longer contracts thus confirming the predictions of transaction cost economics, whereas the need for flexibility reduces contract duration. With increasing bilateral trading experience contract duration decreases. We furthermore observe that countries heavily reliant on natural gas imports via LNG are willing to forgo some flexibility in favor of supply security.
