Cracking gas storage and swing valuation

An improved basket of spread options heuristic for merchant. The necessity of it is rising due to changing patterns in the gas market. Seasonal gas storage secures the supply of gas and ensures seasonal gas flexibility. In the energy markets, crack spread options, which either exchange. Both are typically used as feed to fluid catalytic cracking units.

Jun 25, 2019 natural gas is playing a larger role in the energy industry. It is challenging to choose a valuation methodology that honours both financial e. In the most recent blog in this series titled bright lights, big city natural gas storage by region we looked at how the value of natural gas storage within each region varies depending on whether that area is a net producer or net consumer. Before we go about trying to value natural gas storage, we should try and come up with a list of important considerations in any valuation process.

The evaluation of gas swing contracts with regime switching. Kystore and kyswing support traders, portfolio and risk managers in. In catalytic reforming, the change in the boiling point of the stock passed through the unit is relatively small as the hydrocarbon molecular structures are rearranged to form higheroctane aromatics with only a minor amount of cracking. Fuel spread options power plant and tolling valuation. Gas storage is an important part of the gas market chain. Gas storage valuation intro optimization models in the. We assume that each forward price follows a geometric brownian motion process. It requires threshold gas level to maintain pressure required. Optimal gas storage valuation and futures trading under a. Valuing a gas station, convenience store kotzin valuation.

Value is almost exclusively derived through the cost and market approaches with the income approach being rarely used. Under special conditions, contracts of this kind can be seen as a strip of american spread options, where the spread is the difference between a calculated contract price and the market price for the reference commodity. Swing and storage products form the foundation of the evolving market for gas flexibility in europe. The purpose of the thesis is to price a generalized swing option based on natural gas or electricity. It requires both appropriate price models and optimization models. Such valuations are typically done when financingpurchasing storage facilities, structuring contracts to lease storage facilities or marking to market the value of these assets. In this respect natural gas storage facilities constitute the only efficient and. Before we apply a numerical algorithm to solve the problem, we first identify the structure of the optimal. Swing options and their variants have a potentially wide array of application. A typical gas swing contract is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain period at a specified set of contract prices.

The volume of delivered gas is adjusted daily at the buyers discretion. Natural gas storage valuation is a challenging topic. Value is almost exclusively derived through the cost and market. Pdf viability of seasonal natural gas storage in the saudi energy. The two most popular are the classical intrinsic valuation based on physical futures contracts, which is equal to the optimal discounted value of calendar spreads, and the extrinsic valuation, which uses spot. The vacuum distillation consists of the vacuum furnace, vacuum tower. Natural gas storage valuation file exchange matlab central. Gas storage and swing report quarterly update kyos.

The use of this website constitutes acceptance of our user agreement. But for most people, its the exploration and production, drilling, and refining of oil and. The crack spread is used to financially replicate the physical reality of a refinery as it. Most of the time the commodities involved are gas and oil. The valuation of the former is of course trivial as the prices are set by the market, therefore the primary focus of this thesis is in obtaining marketbased pricing measures for the purpose of storage valuation. The energy sector comprises of oil and gas, utilities, nuclear, coal, and alternative energy companies. Gas storage valuation and optimisation software from lacima group. We investigate the valuation of a natural gas storage facility, where trading is permitted on both futures and spot markets simultaneously. Valuation of electricity swing options by applying multistage. Cracking gas storage and swing valuation 21 jan, 20. Gas station asset valuation equipment 160 approaches to valuation like real property and business valuation, machinery and equipment are valued through the cost, market, and income approaches. Kystore and kyswing support traders, portfolio and risk managers in natural gas markets. The value of a gas storage contract also includes the reservation charges lease payments that are paid by the long position holder to.

Oil gas valuation quick reference amazon web services. Pricing and optimisation of natural gas storage energy analyst. However, the investments in gas storage are exposed to a number of uncertainties which affect investors behaviour. Types of storage at last count, we had more than 3. Pricing and hedging of swing options in the european. Nov 25, 2015 in this paper we treat a gas storage valuation problem as a markov decision process. In particular, two of them, namely the intrinsic valuation and basket of spread methods, were discussed in detail. The gas storage valuation literature has paid limited attention to backtesting. Storage systems in restructured markets are more arbitrageoriented than in countries where. As the european gas market matures, so does the depth and sophistication of flexibility services available. Natural gas storage is a critical component of gas markets worldwide. Natural gas storage valuation, optimization, market and.

But not all gas storage valuations are created equal. Once thought of as a byproduct of oil production, natural gas is now used in a variety of ways, from residential uses to industrial, to. Also, the data requirements should be modest, and the calculation time should be reasonable. Jun 28, 2014 gas storage valuation intro posted on june 28, 2014 by kosofos in practice there are several techniques for gas storage valuation. For this purpose the characteristics and technical idiosyncrasies of natural gas storage facilities are. An introduction to electricity markets and derivatives lecture 3. A hypermarket is a large format discount retailer that sells department store merchandise, groceries and gasoline. In this paper, we evaluate a swing option contract embedded in a real world gas sales agreement.

The storage facility operators owner or lessee objective is to inject gas into storage facility at low price and withdraw gas from storage facility at high price, and benefit from price differential. Lacimas gas storage valuation solution lets you structure, value and hedge your gas storage portfolio to maximise profit. Natural gas is playing a larger role in the energy industry. This paper focuses on the valuation and hedging of gas storage facilities, using a spotbased valuation framework coupled with a financial hedging.

The valuation of a gas stationconvenience store presents a number of special considerations unique issues that ultimately affect the value or discount rate. For example, a variant of swing options, called e xioption, has been used in interest rate risk management. Leastsquares monte carlo, which is the basis for the spot approach, allows for multifactor price processes. Optimal gas storage valuation and futures trading under a highdimensional price process nils l ohndorf1, david wozabal2 1vienna university of economics and business, vienna, austria 2technische universit at munc hen, munich, germany fnils. As discussed just above, sos by wtm is a breakthrough natural gas storage model and is the first to marry together the two critical features needed for storage modeling. Typically, hypermarkets sell three times the volume of gasoline of a traditional convenience store at a discount of 5 to 7 cents per gallon of the retail price. Aug 14, 2014 natural gas storage is a critical component of gas markets worldwide. Apr 07, 2020 to read the complete report with graphs and tables. It provides easytouse tools to help you manage and value gas storage assets of all types. Jan 21, 20 cracking gas storage and swing valuation. Before we go about trying to value naturalgas storage, we should try and come up with a list of important considerations in any valuation process. Gas storage valuation and optimization sciencedirect. Cracking gas storage and swing valuation timera energy. Gas storage valuation using a multifactor price process.

Our backtest implementation is similar, but with a couple of differences. Sometimes, depending on its properties, lvgo is blended with other products like atmospheric diesel. The valuation method used was a real options approach, which incorporates the flexibility and uncertainty of the storage facility operations into the valuation procedure. Natural gas storage is a critical component in our energy infrastructure. As opposed to existing literature we model the gas price process as a regimeswitching model.

All valuations have been performed with kyos software and models, kystore and kyswing. An important concept in the training course on gas storage and swing contracts is the dynamic hedging of the exposures, based on either rolling intrinsic or delta hedging. Storage facility a storage facility has limited and known storage capacity. Jun 29, 2017 natural gas storage is a critical component of gas markets worldwide. Sep 28, 2014 according to us energy information administrations newly released report thursday, sep 25th, 2014, working gas dry natural gas in storage was 2,988 bcf billion cubic feet as of friday. Nov 02, 2015 the storage facility operators owner or lessee objective is to inject gas into storage facility at low price and withdraw gas from storage facility at high price, and benefit from price differential. The accurate valuation and trading of gas storage contracts is a key challenge faced by many organizations who wish to extract. Thus catalytic reforming primarily increases the octane of motor gasoline rather than increasing its yield. Before we apply a numerical algorithm to solve the problem, we first identify the structure of the. The accurate valuation and trading of gas storage contracts is a key challenge faced by many organizations who wish to extract maximum value from these facilities and understand their associated market risks.

The thesis at hand is primarily concerned with the development of a reliable valuation methodology for natural gas storage facilities that offers a healthy balance between mathematical meticulousness, computational efficiency, and manageability. The main objective of this thesis was to investigate an investment opportunity in a natural gas storage facility. In this paper we treat a gas storage valuation problem as a markov decision process. The connection between cstore earnings and property value.

In gas storage valuation a distinction must be made between the value of a storage facility and the value of a gas storage contract to utilize that facility. An important concept in the training course on gas storage and swing contracts is the dynamic hedging of the. Please read our privacy policy and legal disclaimer. Dec, 20 this paper focuses on the valuation and hedging of gas storage facilities, using a spotbased valuation framework coupled with a financial hedging strategy implemented with futures contracts. Spot price also follows a geometric brownian motion process, but its expectation changes from month to. Such a model has shown to fit market data quite well in chen and forsyth quant finance 10. According to us energy information administrations newly released report thursday, sep 25th, 2014, working gas dry natural gas in storage was 2,988 bcf billion cubic feet as of friday. Other applications of swing options include the valuation of storage facilities and the option to repeatedly shut down services. The analysis shows how a tree based approach has been virtually implemented in the us natural gas market henry hub in the period 1999 to 2006. The value of a gas storage contract also includes the reservation charges lease payments that are paid by the long position holder to the short position holder.

We also observed that the explosion of natural gas production 35% increase in the last 7 years as. This interview with lynton kotzin was published in the december 2010 issue of business valuation update, a publication of business valuation resources, llc. This interview with lynton kotzin was published in the december 2010 issue of business valuation update, a. The riskneutral futures curve dynamics is specified directly by a heathjarrowmorton model, whereas the intramonth logspot price is given by an ornsteinuhlenbeck process reverting toward the log. Gas storage valuation intro posted on june 28, 2014 by kosofos in practice there are several techniques for gas storage valuation. Natural gas storage optimization data science central. Particular attention will go to intrinsic versus extrinsic valuation, applying concepts such as rolling intrinsic, real options, and leastsquares monte carlo. A market consistent gas storage modelling framework. To read the complete report with graphs and tables. It should also investigate methods for hedging the risks in a swing options, and evaluate how the speci. Spot price also follows a geometric brownian motion process, but its expectation changes from month to month. Typically, hypermarkets sell three times the volume of gasoline of a traditional convenience store at a discount of 5 to 7 cents per. Viability of seasonal natural gas storage in the saudi energy system. I will survive making money with natural gas storage in the.

Gas storage valuation and optimisation software from lacima. Training course on gas storage and swing contracts kyos. Gas stationcstore valuation 10 sba 25 year loan maturation aside from allocations of real estate verses intangibles where there will always be differing points of views, the major concern we see with sba lenders and special use gas station and car wash properties is that of remaining economic life. This example demonstrates using matlab to analyze and value a natural gas storage contract. Jan 06, 2020 the energy sector comprises of oil and gas, utilities, nuclear, coal, and alternative energy companies. He can be reached at email protected or 541 8230029. John breslin, les clewlow, tobias elbert, calvin kwok, chris. Gas storage january 2009 energy risk 61 h in the previous article in this masterclass series, we gave an overview of four common valuation methodologies for a gas storage facility. Figure shows that light vacuum gas oil lvgo and heavy vacuum gas oil hvgo, are produced.