Empirical Identification of Japanese LNG S-Curve Contracts: Cointegration and Structural Breaks

This paper investigates the long-run equilibrium relationship between Indonesian Liquefied Natural Gas (LNG) and Brent Crude oil prices from 1992 to 2011 through the lens of cointegration. While industry rules-of-thumb for LNG pricing are commonly used and suggest a stable equilibrium relationship, few academic papers have investigated the these particular commodity prices. Furthermore, those that do pay little attention to the possibility of shifts in the underlying parameters, either over time or crude oil prices. This paper confirms that there is a long-run cointegrating relationship between LNG and crude oil prices, but also shows that there are significant structural changes in it.