Abstract for: A system dynamics approach to the expansion of liquefaction capacity in the LNG industry

Capacity and price cycles in capital-intensive industries affect firms’ performance and profitability, and there is a need for understanding the mechanisms and dynamics of investment in capacity expansion. We report the main results of the analysis of investment decisions in the LNG industry, specifically in the liquefaction segment. We propose a model in which investors estimate the capacity needed from their expectations for future demand. This estimation changes as market sentiment encourages or discourages investments. Market sentiment is increased by profitability and is decreased by projects under construction as investors would find stronger competition for allocating their supply According to the results, liquefaction capacity increases until 2030 as a result of increasing forecast of demand and high prices. In the 2010s capacity even overpasses demand expectations due to decisions prior 2011. When investors are driven only by profits of the market, cycles of capacity appear, which agrees with other markets such as electric ones. This result suggests that investors indeed are aware of the likely saturation of the market in the near term. Under low and high prices, industry is still profitable, being those results very similar although model seems to be more sensitive to low prices.