Can LNG Increase Competitiveness in the Natural Gas Market?

Abstract

The following paper aims at studying the competitive effect of the entry in the gas market of importers of liquefied natural gas (LNG hereafter). In particular we would like to analyze whether the construction of LNG terminals and the entry of LNG importers can have a positive effect on the gas price and therefore on consumers' welfare. The present paper formalizes some plausible scenarios for the gas market in the next years and studies the resulting prices. It will then turn to an empirical analysis in order to see which of the assumed scenarios is more likely to emerge in these future years. The main result of the model is that entry of LNG importers in the market for natural gas can have a positive competitive effect even if LNG has higher total cost, but only under some stringent conditions. The main of them can be summarized as follows: new competitors must enter the LNG market; an active spot market should develop; LNG cost should decrease. The empirical analysis shows that these conditions are very likely to be fulfilled in the future.