Evaluating the Benefits of LNG Procurement through Spot Market Purchase

Natural gas (NG) is liquefied for shipping and storage purposes, this gas in liquid state is known as liquefied natural gas (LNG). The trade of LNG is usually regulated by contracts between suppliers and buyers. Historically long term contracts covering 20-25 years have been used; but more recently, due to emergence of new suppliers and consumers spot market purchases of LNG has also become possible. Nowadays, a consumer can opt to procure LNG via long term contracts or from spot market purchase or a combination of the two. We seek to evaluate the relative benefits of long term versus spot purchases. As a first step, in this paper, we report a mixed-integer linear programming (MILP) model to compare the cost of transportation through long term contracts as against spot market purchase. Several examples are solved; the results show that, in every case, spot market purchase is better compared to long term contracts.