Vertical structures in the global liquefied natural gas market [Elektronische Ressource] : empirical analyses based on recent developments in transaction cost economics / Sophia Rüster

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Vertical Structures in the Global Liquefied Natural Gas Market: Empirical Analyses Based on Recent Developments in Transaction Cost Economics Dissertation zur Erlangung des akademischen Grades Doctor rerum politicarum (Dr. rer. pol.) vorgelegt an der Fakultät Wirtschaftswissenschaften der Technischen Universität Dresden im Januar 2010 von Dipl.-Wi.-Ing. Sophia Rüster (geboren am 12. September 1982 in Eisenach) verteidigt am 25. Juni 2010 Betreuender Hochschullehrer (1. Gutachter): 2. Gutachter: Prof. Dr. C. von Hirschhausen Prof. Dr. M. Lehmann-Waffenschmidt Technische Universität Dresden Technische Universität Dresden Lehrstuhl für Energiewirtschaft Professur für Managerial Economics Acknowledgements I am especially grateful to my supervisor, Prof. Christian von Hirschhausen, for giving me the opportunity to work on this dissertation at the Chair of Energy Economics and Public Sector Management at Dresden University of Technology, for his collaboration, helpful comments and suggestions, and for having been thrown in at the deep end several times. The last years have been full of great experiences and new knowledge does not confine itself only to transaction cost economics and the economics of natural gas markets. I would like to thank Prof. Stéphane Saussier, from whom I learned much about theories of the firm and empirical work and who always was available for comprehensive discussions.

Informations

• Publié par: technische_universitat_dresden
• Publié le: 01 janvier 2010
• Nombre de lectures: 15
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

Vertical Structures in the Global Liquefied Natural Gas

Market: Empirical Analyses Based on Recent Developments in

Transaction Cost Economics

Dissertation zur Erlangung des akademischen Grades Doctor rerum politicarum (Dr. rer. pol.) vorgelegt an der Fakultät Wirtschaftswissenschaften der Technischen Universität Dresden im Januar 2010 von Dipl.-Wi.-Ing. Sophia Rüster (geboren am 12. September 1982 in Eisenach)

verteidigt am 25. Juni 2010

Betreuender Hochschullehrer (1. Gutachter): Prof. Dr. C. von Hirschhausen Technische Universität Dresden Lehrstuhl für Energiewirtschaft

2. Gutachter:

Prof. Dr. M. Lehmann-Waffenschmidt Technische Universität Dresden Professur für Managerial Economics

Acknowledgements

I am especially grateful to my supervisor, Prof. Christian von Hirschhausen, for giving me the opportunity to work on this dissertation at the Chair of Energy Economics and Public Sector Management at Dresden University of Technology, for his collaboration, helpful comments and suggestions, and for having been thrown in at the deep end several times. The last years have been full of great experiences and new knowledge does not confine itself only to transaction cost economics and the economics of natural gas markets. I would like to thank Prof. Stéphane Saussier, from whom I learned much about theories of the firm and empirical work and who always was available for comprehensive discussions. Furthermore, I had the great opportunity to discuss my work with Oliver Williamson, Jackson Nickerson, Scott Masten, and Jean-Michel Glachant at the European School on New Institutional Economics in Cargèse. They helped me a lot to understand the manner of thinking of institutional economists and gave me various inspirations on how to improve and continue my work. I thank Jeff Makholm, Manfred Hafner and David Nissen for their very helpful insights into (liquefied) natural gas markets. Special thanks go to Jan Abrell, Anne Neumann, Hannes Weigt, and my other colleagues for giving me a broader view on network industries and economic theory. Special thanks also go to my family for always supporting me in what I do and for their steady interest in my work. Finally, I thank Philipp for his encouragement, particularly during the last months of this dissertation; he did not cease to assure me that things would work out all right.

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Abstract During the last decade, the global liquefied natural gas (LNG) market altered substantially. Significant investments have been realized, traded volumes increased and contracting structures gained in flexibility. Various governance forms co-exist, including the poles of spot market transactions and vertical integration as well as numerous hybrid forms such as long-term contracts, joint ventures, and strategic partnerships. This dissertation empirically investigates, based on transaction cost economics and recent extensions thereof, which motivations drive companies towards the choice of hierarchical governance forms. First, the likelihood of vertical integration and the impact of inter-organizational trust as a shift parameter accounting for differences in the institutional environment are analyzed. Estimation results confirm transaction cost economics by showing that relationship-specific investments in an uncertain environment drive LNG companies to invest in successive stages along the value chain. Furthermore, the presence of inter-organizational trust increases the likelihood of less hierarchical governance modes. Second, alternative theories of the firm are linked in order to explain the menu of strategic positions recently observed in this dynamic market. Estimation results support the positioning- economizing perspective of the firm. The three strategic choices of target market position, resource profile, and organizational structure are interdependent. Third, the determinants of optimal contract length as a trade-off between the minimization of transaction costs due to repeated bilateral bargaining and the risk of being bound in an inflexible agreement in uncertain environments is discussed. Estimation results show that the presence of high asset specificity results in longer contracts whereas the need for flexibility in today’s LNG market supports shorter agreements. When firms have experience in bilateral trading, contract duration decreases. In addition, countries heavily reliant on natural gas imports via LNG are often willing to forgo some

flexibility in favor of supply security. Contracts dedicated to competitive downstream markets on average are shorter than those concluded with customers in non-liberalized importing countries. JEL Codes: D23, L22, L95 Keywords: Transaction cost economics, shift parameter framework, positioning-economizing perspective, vertical integration, long-term contract, contract duration, liquefied natural gas

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Table of Contents Acknowledgements .................................................................................................................................ii Abstract ..................................................................................................................................................iii Table of Contents ................................................................................................................................... iv List of Figures .......................................................................................................................................vii List of Tables..........................................................................................................................................ix List of Abbreviations............................................................................................................................... x 1Introduction ................................................................................................................................... 1 1.1The issue ................................................................................................................................ 1 1.2Approach................................................................................................................................ 2 1.3Structure of the thesis............................................................................................................. 4 2.............................................................. 6Recent Developments in Transaction Cost Economics 2.1 Transaction cost economics in the framework of New Institutional Economics ................... 6 2.1.1 Introduction to New Institutional Economics.................................................................... 6 2.1.2 Alternative theories of the firm.......................................................................................... 8 2.2 Transaction cost economics: A static concept ..................................................................... 11 2.2.1 The concept of transaction costs: From Coase (1937) to Williamson (1975, 1985) ....... 11 2.2.2 Discriminating alignment ................................................................................................ 15 2.3 Transaction cost economics: An empirical success story? .................................................. 19 2.3.1 Review on empirical literature......................................................................................... 19 2.3.2 Limitations of existing empirical literature ..................................................................... 22 2.3.2.1 Inconsistency with hypotheses derived from transaction cost theory ..................... 22 2.3.2.2 Measurement difficulties ........................................................................................ 23 2.3.2.3 Endogeneity of right-hand-side variables ............................................................... 24 2.3.2.4 Tests based on reduced form models ...................................................................... 25 2.4 Recent trends in transaction cost economics........................................................................ 28 2.4.1 From a static to a dynamic concept ................................................................................. 28 2.4.2 Linking alternative theories of the firm ........................................................................... 28 2.4.3 Structural form tests: The two-stage Heckman model..................................................... 29 2.4.4 Relational contracting...................................................................................................... 33 2.5 Summary and conclusions ................................................................................................... 36 2.6Appendix.............................................................................................................................. 37 3Dynamics in the Liquefied Natural Gas Industry .................................................................... 46 3.1 Introduction.......................................................................................................................... 46

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3.2 The LNG industry ................................................................................................................ 47 3.2.1 LNG value chain.............................................................................................................. 47 3.2.2 Development of the LNG industry .................................................................................. 50 3.2.3 Globalization of the natural gas market........................................................................... 53 3.3 Prospects for liquefied natural gas ....................................................................................... 56 3.3.1 Prospects for LNG exporters ........................................................................................... 57 3.3.2 Prospects for LNG importers........................................................................................... 59 3.3.2.1 North America ........................................................................................................ 60 3.3.2.2 South America ........................................................................................................ 64 3.3.2.3 Europe..................................................................................................................... 64 3.3.2.4 Asia Pacific ............................................................................................................. 66 3.3.2.5 Summary ................................................................................................................. 67 3.4 Vertical structures in the LNG industry............................................................................... 69 3.4.1 The changing role of long-term contracts........................................................................ 69 3.4.2Recent trends towards vertical and horizontal integration............................................... 72 3.5Summary and conclusions ................................................................................................... 75 3.6Appendix.............................................................................................................................. 76 4Inter-organizational Trust as a Shift Parameter in the Extended Transaction Cost Framework........................................................................................................................................... 83 4.1Introduction.......................................................................................................................... 83 4.2Literature review.................................................................................................................. 84 4.3Theoretical background ....................................................................................................... 85 4.3.1Inter-personal and inter-organizational trust ................................................................... 85 4.3.2Trust versus formal contracts: Complements or substitutes? .......................................... 87 4.3.3............................................................. 88Formalization of the shift parameter framework 4.3.4Industry-specific propositions ......................................................................................... 90 4.4......................................................................................................... 92Data and methodology 4.4.1Data.................................................................................................................................. 92 4.4.2Explanatory variables ...................................................................................................... 94 4.4.3Methodology.................................................................................................................... 99 4.5Estimation results and interpretation.................................................................................. 102 4.5.1Probit model .................................................................................................................. 103 4.5.2Ordered probit model..................................................................................................... 106 4.6Summary and conclusions ................................................................................................. 108 4.7Appendix............................................................................................................................ 110

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5115Linking Transaction Cost Economics and Strategic Management....................................... 5.1Introduction........................................................................................................................ 115 5.2Literature review................................................................................................................ 115 5.2.1Transaction cost economics versus strategic management............................................ 115 5.2.2............................................... 117Recent trends toward a synthesis of competing theories 5.3Theoretical background ..................................................................................................... 119 5.3.1Positioning-economizing perspective............................................................................ 119 5.3.2Industry-specific propositions ....................................................................................... 121 5.4....................................................................................................... 123Data and methodology 5.4.1Data................................................................................................................................ 123 5.4.2Explanatory variables .................................................................................................... 123 5.4.3Methodology.................................................................................................................. 128 5.5Estimation results and interpretation.................................................................................. 129 5.6Summary and conclusions ................................................................................................. 132 5.7Appendix............................................................................................................................ 134 6136Optimal Contract Duration of Long-term LNG Supply Contracts: A Trade-off ............... 6.1Introduction........................................................................................................................ 136 6.2Literature review................................................................................................................ 138 6.3Theoretical background ..................................................................................................... 141 6.3.1.......................................................................... 141Optimal contract duration: A trade-off 6.3.2The impact of transaction frequency ............................................................................. 143 6.4Data and methodology ....................................................................................................... 144 6.4.1Data................................................................................................................................ 144 6.4.2Explanatory variables .................................................................................................... 146 6.4.3Methodology.................................................................................................................. 152 6.5Estimation results and interpretation.................................................................................. 152 6.6Summary and conclusions ................................................................................................. 157 6.7Appendix............................................................................................................................ 159 7Conclusions ................................................................................................................................ 162 Bibliography ...................................................................................................................................... 164

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List of Figures Figure 1: Williamson's four levels of social analysis .............................................................................. 8 Figure 2: Organizational failure framework.......................................................................................... 14 Figure 3: Discriminating alignment ...................................................................................................... 17 Figure 4: Comparative production and governance costs ..................................................................... 18 Figure 5: Rival propositions on the impact of asset specificity on transaction costs ............................ 26 Figure 6: LNG value chain.................................................................................................................... 47 Figure 7: Development of average liquefaction train size by start-up year........................................... 48 Figure 8: Development of per unit costs of liquefaction and regasification projects ............................ 50 Figure 9: Development of natural gas imports of the world’s major importing regions ....................... 51 Figure 10: Countries participating in LNG trade and inter-regional trade volumes 1999 vs. 2009 ...... 52 Figure 11: Development of LNG trade and shipping capacities ........................................................... 54 Figure 12: Development of crude oil and natural gas prices................................................................. 55 Figure 13: Development of liquefaction capacities............................................................................... 59 Figure 14: North American LNG import potential................................................................................ 62 Figure 15: Development of North American LNG imports and nominal import capacity ................... 64 Figure 16: Development of regasification capacities ............................................................................ 68 Figure 17: World liquefaction versus regasification capacities............................................................. 68 Figure 18: Development of short-term and spot trade........................................................................... 71 Figure 19: Development of world natural gas consumption ................................................................. 76 Figure 20: Development of vessel capacity by start-up year................................................................. 76 Figure 21: Development of shipping capacities .................................................................................... 76 Figure 22: Import country matrix .......................................................................................................... 79 Figure 23: Supply costs for potential sources of gas delivered to Europe (USD/MBTU) .................... 81 Figure 24: Average LNG import prices (monthly data) ........................................................................ 81 Figure 25: Oil-linkage in long-term natural gas contracts..................................................................... 82 Figure 26: Shift parameter with an impact on a governance cost curve’s intercept (a) and slope (b)... 88 Figure 27: Inter-organizational trust as a shift parameter ..................................................................... 90 Figure 28: Number of observed corporate-specific value chains by export and import region ............ 93 Figure 29: Shift parameter framework (stability of property rights) in Williamson (1991b) ............. 110 Figure 30: Shift parameter framework (increased reputation) in Williamson (1991b) ....................... 110 Figure 31: Shift parameter framework in Oxley (1999)...................................................................... 111 Figure 32: Shift parameter framework in Henisz and Williamson (1999) .......................................... 111 Figure 33: Positioning-economizing perspective ................................................................................ 121 Figure 34: Optimization problem ........................................................................................................ 142 Figure 35: Extended optimization problem including transaction frequency ..................................... 144 Figure 36: Contract duration and start of deliveries of contracts included in the sample ................... 145

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Figure 37: Distribution of regional trade patterns in the dataset ......................................................... 146 Figure 38: Predicted values CD using 2SLS including STDEVOIL................................................... 157 Figure 39: Predicted values CD using 2SLS excluding STDEVOIL .................................................. 161

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List of Tables Table 1: Attributes of alternative governance modes ............................................................................ 17 Table 2: Development of empirical literature ....................................................................................... 22 Table 3: Selected empirical studies testing transaction cost economics: Make or buy ......................... 37 Table 4: Selected empirical studies testing transaction cost economics: Contractual provisions ......... 43 Table 5: Development of costs along the LNG value chain.................................................................. 49 Table 6: Existing and proposed liquefaction facilities as of 2009......................................................... 77 Table 7: Existing and proposed regasification facilities as of 2009 ...................................................... 78 Table 8: EIA Annual Energy Outlook projections over time (reference case)...................................... 80 Table 9: LNG characteristics................................................................................................................. 82 Table 10: Explanatory variables and summary statistics ...................................................................... 97 Table 11: Correlation matrix ................................................................................................................. 98 Table 12: Estimation results probit model........................................................................................... 105 Table 13: Predictive power probit model (Model 4) ........................................................................... 106 Table 14: Estimation results ordered probit model ............................................................................. 107 Table 15: Predictive power ordered probit model (Model 4) .............................................................. 108 Table 16: Marginal effects probit model ............................................................................................. 113 Table 17: Marginal effects ordered probit model................................................................................ 114 Table 18: Explanatory variables and summary statistics .................................................................... 126 Table 19: Correlation matrix ............................................................................................................... 127 Table 20: Estimation results ................................................................................................................ 132 Table 21: Explanatory variables and summary statistics .................................................................... 150 Table 22: Correlation matrix ............................................................................................................... 151 Table 23: Estimation results explaining CD including STDEVOIL ................................................... 155 st Table 24: Estimation results 1 stage explaining VOL including STDEVOIL................................... 156 Table 25: Estimation results explaining CD excluding STDEVOIL .................................................. 159 st Table 26: Estimation results 1 stage explaining VOL excluding STDEVOIL .................................. 160

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List of Abbreviations 2SLS two-stage least squares AIC Akaike information criterion bbl barrel bcm billion cubic meters bcm/a billion cubic meters per year BIC Bayesian information criterion BP British Petroleum bn billion cif cost, insurance, and freight included des delivered ex-ship E&P exploration and production EA econometric analyses EIA Energy Information Administration FERC Federal Energy Regulatory Commission fb frequency of transactions between the same trading partners fob free-on-board fw frequency of transactions within the relationship GC governance costs GIIGNL Groupe International des Importateurs de Gaz Naturel Liquéfié GMM generalized method of moments GW gigawatt H hierarchy IEA International Energy Agency IV instrumental variable kg kilogram l liquefaction capacity L hybrid governance modes LNG liquefied natural gas M market m³ cubic meter MARAD Maritime Administration MB marginal benefits MBTU million British thermal units MC marginal costs MENA Middle East and North Africa MJ megajoule

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mn mtpa N NBP NI NIE NOC OECD OLS PC Pr r s Std. dev. t TAC TWh u UK US USD VI WTI

million million tons per year number of observations National Balancing Point non-integration New Institutional Economics national oil and gas company Organization for Economic Co-operation and Development ordinary least squares production costs probability regasification capacity asset specificity standard deviation

trust transaction costs terra Watt hours uncertainty United Kingdom United States US Dollar vertical integration West Texas Intermediate

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