A STRATEGY OF LNG EXPORTING COUNTRIES FOR TRADING IN THE NORTHEAST ASIAN REGION: OLIGOPOLISTIC STRUCTURES IN SPOT AND LONGTERM TRADINGS

摘要

OverviewIn this study, oligopolistic structures of LNG trading in Northeast Asia were estimated and the strategies of LNGexporting countries when they determine LNG prices were examined based on the estimation results. This study is afurther study of Choi and Heo (2017a) estimating only the oligopolistic structures of LNG spot trading in NortheastAsia. This study examined the oligopolistic behaviors of exporting countries when they determine LNG long-termcontract prices of LNG as well as spot prices. In this study, Indonesia and Qatar were considered as LNG exportingcountries and Korea and Japan were considered as LNG importing countries. A total of four oligopolistic structuresfor each spot and long-term prices were considered: Bertrand competition, price leadership of Indonesia, priceleadership of Qatar, and price collusion. In addition, Voung’s closeness tests were conducted to determine thesuperiority of the models.There are two different opinions about the effect of long-term contracts on the competition in spot trading: anticompetitive(Liski and Montero, 2006) and pro-competitive (Allaz, 1992; Allaz and Villa, 1993). It is important toexamine the oligopolistic behaviors of exporting countries in spot trading since the proportion of LNG spot tradingexpands in the Northeast Asian region. However, LNG long-term contracts still dominate, and long-term contractsplay an important role in stable LNG supply for importing countries. Empirically, as Choi and Heo (2016) and Choiand Heo (2017b) pointed out, there were price premiums and discounts in the long-run LNG contract price formula.Therefore, it is also important to examine the oligopoly structure and competition of LNG long-term trading as wellas spot trading. The results of this study can be used as a basic research for establishing LNG import strategy andpolicy in Northeast Asian countries.MethodsIn this study, the oligopolistic circumstance of a 1-importing country (Korea or Japan) and 2-exporting countries(Indonesia and Qatar) was assumed. The basic functions used in this study are expressed as equation (1) to (4).Equation (1) is a demand function of an importing country for LNG spot volumes and equation (2) is a profitfunction of exporting countries. Equation (3) is an expected utility function of an importing country which is riskaverseto the long-term contract prices and equation (4) is an expected profit function of exporting countries whichare risk-averse. Equation (3) and (4) are used when exporting and importing countries adjust the long-term contractprices.Under this oligopolistic circumstance, simultaneous equations models were constructed using demand functions andthe first order conditions for spot pricing and adjusting long-term contract prices. The simultaneous equationsmodels consist of a total of six equations, including two spot LNG demand functions, two first order conditions formaximizing profit functions of exporting countries (spot pricing), and two first order conditions for maximizing jointprofit functions between exporting and importing countries (adjusting long-term contract prices). Here, the first orderconditions for spot and long-term contract pricing depend on the four oligopolistic structures assumed in this study.These simultaneous equations models can be expressed by Ax+b=u, where x is a vector of endogenous variableswhich consist of LNG spot volumes, spot prices, and long-term contract prices for each exporting country and u is avector of disturbance terms. Matrix A and vector b are consist of exogenous variables and parameters to be estimated.This general form of simultaneous equations models was estimated by Full Information Maximum Likelihoodmethod after imposing structure-specific constraints. After estimating all models, Voung’s closeness test which is apair-wise test of fittingness was conducted to find the best model which can describe the LNG trade in the NortheastAsia region.ResultsTable 1 shows results of Voung's closeness tests of 4 oligopolistic models for the case of Korea before Fukushimanuclear accident. As shown in Table 1, the model of price collusion in long-term contract pricing and Bertrandcompetition in spot pricing was superior to any other model.ConclusionsSupposing that the model of price collusion in long-term contract pricing and Bertrand competition in spot pricing isthe best model among 16 oligopolistic structures, it means that Indonesia and Qatar had adjusted long-term contractprice collusively while they had set spot price competitively. If these results are the same after the Fukushima nuclearaccident, Korea should prepare LNG import policies and strategies to eliminate the incentive for Indonesia and Qatarto cooperate collusively. Even if it changes to Bertrand competition after Fukushima nuclear accident, it is necessaryto develop a strategy to reduce incentives to do collusive behavior again.