A Game-Theoretic Analysis of Canada’s Entry for LNG Exports in the Asia-Pacific Market

Abstract

The import demand for energy resources, including liquefied natural gas (LNG), has been steadily increasing in the Asia-Pacific region. Australia, the Middle East (Qatar), the Russian Federation, and the U.S. are the major players who compete strategically to capture this ever-growing market for LNG. The objective of this paper is to examine the potential for Canada’s entry into this market as another LNG exporter and what impact that can have on the existing suppliers. Using a game-theoretic LNG export competition model, we explore the conditions under which Canada can make a profitable entry. We also investigate the effect of Canada’s entry on the profitability of the four incumbent exporters. Employing a multi-leader Stackelberg model, we found that Canada’s entry could be a Pareto superior outcome under certain conditions because it benefits all competing firms and consumers. Further, Canada’s entry into the LNG export market always helps the low-cost incumbent firms by increasing their output and profit. However, the high-cost incumbent firms’ output falls, while their profit may increase or decrease depending on the unit cost and market size parameters. With differential export costs between Canada and the U.S., the latter has an incentive to act strategically to affect the entrance of the former.