Cooperation in the global lng industry: is rationalization the sole objective?
Olivier Massol, IFP School, +33147526826,
Nadine Bret-Rouzeau, IFP School, +33147526000,
Stéphane Tchung-Ming, IFP, +33147525327,
Overview
The emergence of the Gas Exporting Countries Forum (GECF in 2001 raised new concern about security of supply in gas importing countries. Part of the concern is that – within a few years – this passive club of gas exporters could become active as an “OPEC for gas”. In this context, it is not surprising to observe a revival in the literature devoted to natural gas trade and more particularly to cooperation between gas exporters. More specifically, attention is focussing on the trade of Liquefied Natural Gas (LNG), since GECF countries have a privileged position in this regard. These countries collectively own nearly 90% of the world liquefaction capacity (Hallouche, 2006). Moreover, this trade is growing fastly: 7.4% per year on average since 2000 and now represents nearly 30% of international trade in gas (BP, 2008). In the recent years, it has experienced major developments: decreasing costs of transporting LNG (Greaker et al., 2008), development of transoceanic trade between previously fragmented markets (Jensen, 2003), emergence of arbitrage opportunities between importing regions (Yepes Rodríguez, 2007)... However, the "commoditization" of LNG is still only partial: long-term contracts remain dominant.
Some recent publications have proposed a detailed analysis of the GECF, focusing on policy issues (Hallouche (2006), Soligo and Jaffe (2006), Wagbara (2007) or Tönjes and de Jong (2007)). These work of have provided numerous insights regarding both the nature and the objectives of the GECF. Several options[t1] can be considered depending on the GECF’s behaviour. It may choose to behave as a cartel and could lead to market power abuses, or simply be analyzed as a regional cooperation that would only focus on a cost optimization without trying to exercise any market power. As an example, those supporters often quote that a mere observation of recent trade flows suggests that significant optimization opportunities could easily be captured by such an organisation. At first sight, a harmful cartel seems easy to analyse thanks to classic textbook models. Of course, from a strict welfare perspective, the second solution looks preferable. As a result, it is interesting to note that some observers and market players are using this second argument to support the creation of an “active GECF”. In most cases, they argue that such cooperation could potentially provide huge efficiency gains without any harmful effect on the consumers. Thus, the rationale for such a “market power free” cooperation in the gas industry needs to be carefully analysed. This is precisely the goal of this paper.
Methods
At the GECF level, such a “market power free” cooperation among LNG exporters could well be formalised as a typical transport problem similar to the one proposed by Koopmans (1949) and Kantorovich (1960) and formulated as a linear program by Dantzig (1951). First, the gain that may be achieved through the coordination of exports within the GECF is estimated. Then, we question whether the collective gain were to be substantial enough to lead to a spontaneous formation of such a GECF. Alternatively, possible incentive compatible policies designed to share collective gains are searched for. This naturally needs to be accompanied by the identification of a way of sharing that may encourage all stakeholders to cooperate in the GECF. And, at last, Is the current composition of the GECF best suited for such coordination or participants can find an interest in cooperating in a coalition restricted? All these questions suggest the use of concepts and methods of cooperative game theory, which focuses on the distribution of gains from cooperation among economic agents. This theory has been used in very different contexts. We use those concepts to evaluate the credibility of the "rationalization" argument.
Results
Using this framework and a maritime cost function inspired by Flood (1954), we estimate the cooperative gain that could have been derived from the cooperation of 12 non-OECD LNG exporters who took part in GECF discussions during the whole year 2007: M$ 968. Unfortunately, such an optimal export policy would not be rationally chosen by some of those LNG exporters. Thus, we assumed that this cooperative gain could be analysed as a Transferable Utility shared according to TU-games concepts. Basic gain sharing methods and TU-solutions have been considered. Naïve methods apart, the list includes the Shapley Value (Shapley, 1953), the nucleolus (Schmeidler, 1969), the per-capita nucleolus (Grotte, 1970) and the disruptive nucleolus (Littlechild and Vaidya, 1976).
None of the considered basic sharing methods belonged to the core of this cooperative game (only the three nucleolus-inspired methods were able to pass – by construction – this core belonging criterion). Moreover, only the per capita nucleolus fulfilled all the suitable requirements for a gain sharing method: core belonging and monotonicity in the aggregate (Young et al., 1980).
Unfortunately, even if we assume (which is far from being obvious) that a bargaining process among those 12 non-OECD LNG exporters could possibly end up with a profit sharing gain based on the per capita nucleolus, their ability to support coordination costs seems limited. A simple computation allowed us to determine the maximum cost that could possibly be paid by those 12 countries with annihilating the existence of a possible cooperation outcome (i.e a non void core). This maximum cooperation cost (around $ 720,000 per year) appears clearly too low to avoid any permanent structure.
Conclusions
As a conclusion, we might think that such a “market power free” cooperation does not look realistic since (0) the gain is limited (1) an incentive compatible gain sharing mechanism has to be elaborated, (2) such a mechanism is not so easy to define (on the eight ones considered in this study, only one was able to fulfil some natural requirements. Moreover, it is not sure whether such a mechanism could be easily selected and enforced after a bargaining process) and (3) a limited coordination cost above $ 720,000 per year would annihilate the incentive to cooperate. As a result, it seems clear that, in the LNG industry, the only possible profitable outcome attached to cooperation would probably has to deal with market power.
References
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[t1]polar cases ?