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Can the Shanghai LNG Price Index indicate Chinese market? An econometric investigation using price discovery theory

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Abstract

China became the world’s second largest liquefied natural gas (LNG) importer in 2018 but has faced extremely high import costs due to a lack of bargaining power. Assessments of the Shanghai LNG Price Index, first released in 2015, are vital for improving the understanding of these cost dynamics. This paper, using the LNG price index data from the Shanghai Petroleum and Gas Exchange (SHPGX) coupled with domestic and international LNG prices from July 1, 2015 to December 31, 2018, estimates several econometric models to evaluate the long-term and short-term equilibriums of the Shanghai LNG Price Index, the responses to market information shocks and the leading or lagging relationships with LNG and alternative energy prices from other agencies. The results show that the LNG price index of the SHPGX has already exhibited a long-term equilibrium and short-term adjustment mechanisms to reflect the average price level and market movements, but the market information transparency and price discovery efficiency of the index are still inadequate. China’s LNG market is still relatively independent of other natural gas markets, and marketization reforms are under way in China. The influence of the SHPGX LNG price index on the trading decisions of market participants is expected to improve with further development of China’s LNG reforms, the formation of a natural gas entry-exit system, and the increasing liquidity of the hub.

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Abbreviations

OGCBMWS:

Ex-factory price of coalbed methane reported by a Chinese PRA

USD:

United States dollar

MBtu:

Million British thermal unit

AIC:

Akaike information criterion

LR:

Likelihood ratio

CQPGX:

Chongqing Petroleum and Gas Exchange

LNG:

Liquified natural gas

SHPGX:

Shanghai Petroleum and Gas Exchange

PRAs:

Price reporting agencies

PNG:

Pipeline natural gas

VECM:

Vector error correction model

ADF:

Augmented Dickey-Fuller (test)

VAR:

Vector autoregression (model)

SHLNGT:

LNG terminal quotes released by the SHPGX

OGLNGT:

LNG terminal quotes reported by a Chinese PRA

PLJKMSD:

Platts DES (Delivered Ex Ship) LNG spot price in Japan/South Korea

HHNGS:

Henry Hub natural gas spot price

EIA (American):

Energy Information Administration

SHLNGWS:

Chinese national ex-factory price index for LNG released by the SHPGX

SHHNSE:

LNG alternative energy price index released by the SHPGX

OGLNGWS:

Chinese national ex-factory price index for LNG released by a Chinese PRA

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Acknowledgements

This work was financially supported by the Post-doctoral Science Foundation of China (Grant No. 2018M641289), the Science Foundation of China University of Petroleum Beijing (No. ZX20200109), and the China Scholarship Council.

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Authors and Affiliations

  1. School of Economics and Management, China University of Petroleum, Beijing, 102249, China

    Yeli Zeng & Danyang Shi

  2. School of International Trade and Economics, University of International Business and Economics, Beijing, 100029, China

    Cong Dong

  3. Department of Earth Sciences, Uppsala University, Uppsala, 75105, Sweden

    Mikael Höök

  4. Crude Oil Department, Petro China International Co., Ltd., Beijing, 100033, China

    Jinhua Sun

Authors
  1. Yeli Zeng
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  2. Cong Dong
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  3. Mikael Höök
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  4. Jinhua Sun
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  5. Danyang Shi
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Correspondence to Cong Dong.

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Zeng, Y., Dong, C., Höök, M. et al. Can the Shanghai LNG Price Index indicate Chinese market? An econometric investigation using price discovery theory. Front. Energy 14, 726–739 (2020). https://doi.org/10.1007/s11708-020-0701-4

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  • DOI: https://doi.org/10.1007/s11708-020-0701-4

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