Hybrid Portfolio Modelling with Fuzzy Analytic Hierarchy Process for Optimal LNG Importation of Korea

Abstract

A new energy transition policy in Korea has increased the importance of liquefied natural gas (LNG) in the energy mix. The Asia-Pacific LNG market is inflexible because long-term contracts are dominant. This market characteristic indicates that developing policies that ensure a stable supply of LNG is essential. This thesis developed a “hybrid portfolio model” for constructing the optimal LNG import portfolio. The model overcomes the methodological limitations of previous studies. The hybrid model consists of a two-portfolio model that combines the mean-variance (MV) portfolio and the linear programming (LP) model. In the first step, the MV model was applied to derive the optimal ratio between long-term and spot contracts. Next, the LP model was used to determine the optimal LNG portfolio. This thesis also applied a fuzzy analytic hierarchy process (AHP) to determine the weights of the cost factors. The application of the fuzzy AHP enabled this research to reflect the tangible and intangible costs more effectively. The hybrid model can construct an effective LNG import strategy because it reflects the characteristics of LNG markets better than previous models and improves methodological limitations. The optimal LNG portfolio calculated in this thesis has significant policy implications. The optimal LNG portfolio shows that the optimal ratios for the long-term and spot contracts are 89.72% and 10.28% respectively. The supply ratios for the Middle East and Southeast Asia decreased, whereas those for the Far East and Oceania significantly increased. The actual supply ratio of the Middle East and Southeast Asia (83%) in the optimal portfolio significantly decreased to 30%. This is because the tangible and intangible factors such as price, maritime transportation and political risks in the Middle East and Southeast Asia region are higher than those in other regions. In contrast, the supply ratios of the Far East and Oceania increased sharply in the optimal portfolio. Additionally, this thesis evaluated the optimal LNG portfolio derived from the model using natural gas security index. Korea’s natural gas security index significantly decreased, indicating that the analytical results offer an important policy viewpoint. Indeed, the policy proposal derived from the optimal portfolio is consistent with the supply diversification policy that the Korean government has promoted. To comprehensively achieve natural gas supply stabilization, Korea needs to increase its political actions, for instance, through energy diplomacy that includes quota participation and strengthening of negotiating capability. However, given long-term contracts dominate the natural gas market in Korea, changing the LNG portfolio in the short run is not possible. Nevertheless, the findings of this thesis can be applied to formulate a long-term LNG policy to significantly improve security policies and reduce the tangible and intangible costs incurred. Therefore, the new analytical framework and the hybrid model developed in this thesis are effective decision-making tools for constructing the optimal LNG portfolio.