Optimal Portfolio for LNG Importation in Korea Using a Two-Step Portfolio Model and a Fuzzy Analytic Hierarchy Process

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 means that the development of policies that ensure a stable supply of LNG is essential. We developed a new model for the optimal LNG import portfolio. The model consists of a two-step portfolio model combining 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 the long-term and spot contracts. Next, the LP model was used to determine the optimal LNG portfolio. We 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 optimal LNG portfolio showed that the optimal ratios for the long-term and spot contracts are 89.72% and 10.28% respectively, and the supply ratios in the Middle East and Southeast Asia decreased, while those in the Far East and Oceania significantly increased. The proposed model is able to build an effective LNG import strategy because it reflects the characteristics of LNG markets better than previous models.