Volatility of LNG trade – an empirical analysis

Abstract

India is the fourth largest importer of LNG to cater to its energy requirements and energy security. Qatar has been the largest exporter and source for the LNG with the natural gas prices indexed with crude oil prices. With crude oil prices touching more than 100 USD/barrel, Asian countries have been looking for other sources of LNG. India has invested in Shale gas in USA and is planning to import from the year 2018 through Gas Authority of India. The prices in USA are indexed with Henry Hub gas prices. Keeping in view, the pressures from the environmental concerns, Natural Gas has been having highest growth over other fuels and is most widely preferred next to crude oil. However, there has been universal common index price for natural gas where every region has been following its own pricing index based various pricing mechanisms. The LNG trade has been increasing over a period and is most widely used method of transport of natural next to Pipelines. This needs huge investment in specialised LNG ships, Liquefaction terminals and Regasification terminals. Hence, the projects would need huge financial support which in turn would look for long term fuel contracts to support the project. Therefore, Long term fuel supply agreements for LNG supply is required where the prices of natural gas are indexed based on various pricing mechanisms. Owning to various factors these prices have been volatile due to indexing and thus countries like India and Japan have been paying high prices for energy and loss foreign exchange. Keeping in view, the options for India to import from Qatar based on Japanese Crude cocktail prices and from USA based on Henry Hub prices, GARCH models have been used to study the volatility in both the index prices.