Effect of hold-up potential on natural gas exports

Producers and users of natural gas are often connected by a single pipeline which represents a high up-front sunk cost and which may pass through a number of jurisdictions before reaching its final destination. Given the lack of alternatives available to producers and consumers, there is considerable potential for postcontractual opportunism not only by the parties to the contract but by transit countries as well. Hold-up potential, which creates uncertainty about future revenue from the resource, may provide incentives for the resource owners to shift the revenue stream towards the present, hence accelerating resource extraction. The data analysis tests the importance of hold-up potential in the decisions of gas exporters. Using panel data and instrumental variables, to account for endogenous prices, the analysis shows that holdup costs play an important role in the decision making process of natural gas suppliers.