Are LNG regasification facilities a financially viable investment to diversify natural gas markets? : a real option approach to investments in an LNG-regasification plant

University essay from SLU/Dept. of Economics

Abstract: This thesis looks at the value of having the option to buy gas on the world Liquified Natural Gas-market rather than just relying on one distributor via pipeline. The world market for natural gas is characterized by rigid distribution methods and there is no short term flexibility of destination for the seller and almost no possibility for buyers to buy gas on a competitive market. The investment is evaluated using real option analysis. The computational method for the valuation is Monte Carlo simulations and pipeline gas prices and Liquid Natural Gas prices will be modelled through stochastic modelling and the prices are assumed to be characterized by mean reversion and price convergence. The model will be developed following Yepes Rodríguez (2008) model of natural gas price progression. The main conclusion is that he value of investing in a regasification facility is found to be positive and that LNG regasification facilities a financially viable investments to diversify natural gas markets.

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