Economics of the LNG Value Chain and Corporate Strategies

This paper analyzes corporate strategies in the emerging global market for liquefied natural gas (LNG). In particular, we provide an empirical analysis of the determinants driving companies towards increasing vertical integration leading to an industry in which a small number of large and powerful players are active. Our hypothesis of high transaction costs along the LNG value chain inducing a higher degree of vertical integration is tested by implementing Ordered Response Models. To explain determinants of vertical integration in the LNG industry we derive proxy variables by using explicit project data on 85 LNG (importing and exporting) projects worldwide. The transaction cost attributes asset specificity, uncertainty and frequency are measured. Additionally, we include industry and firm characteristics into the analysis. Our results show that players active in LNG export projects are characterized by a higher degree of vertical integration than those situated on the importing side of the value chain. The extent of investments in specific assets has a positive impact on the degree of vertical integration. The extent of vertical integration has increased significantly with start up dates of projects since 2002. Private companies’ degree of vertical integration exceeds the degree of vertical integration of state-owned entities. Players tend to be more integrated with rising firm size and frequency of transactions in the LNG industry. We show that for value chains situated in the Atlantic Basin (in contrast to the Pacific Basin), and there especially for value chains connecting to European instead of North American import markets, the degree of vertical integration is higher.