Arbitrage in natural gas markets?

Regional LNG markets are characterized by substantial price differences since 2009. These regional differentials in prices suggest arbitrage possibilities which are incompatible with functioning markets; this creates a puzzle. This paper seeks to explain this puzzle by investigating potential explanations ranging from transport costs, bottlenecks in network (liquefaction, shipping and regasification), and restrictions arising from contracts. Of these factors, only the past and current constraints on U.S. liquefaction capacity has some explanatory power. However, this cannot be the entire story because given this past and current constraint, U.S. gas producers can engage in intertemporal speculation, i.e., keep their gas in the ground until the necessary liquefaction capacity exists and U.S. gas prices increase towards the prices in other regions (transport costs leave from price differences). Since it is difficult to believe that such obvious and simple money pumps are not exploited, further explanations are needed and linked to potential U.S. government interventions; high and irreversible investment costs and rational expectations (i.e., others too will exploit this opportunity, which will move regional prices closer) further add to keep investments low. Summarizing, these factors combined can explain the price differences of the past and their persistence, albeit at a lower level, in the future.