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Robust Management and Pricing of Liquefied Natural Gas Contracts with Cancelation Options

Author

Listed:
  • V. Guigues

    (UFRJ/Eng. Industrial and FGV/EMAp)

  • C. Sagastizábal

    (IMPA)

  • J. P. Zubelli

    (IMPA)

Abstract

Liquefied Natural Gas contracts offer cancelation options that make their pricing difficult, especially if many gas storages need to be taken into account. We develop a valuation mechanism from the buyer’s perspective, a large gas company whose main interest in these contracts is to provide to clients a reliable supply of gas. The approach combines valuation with hedging, taking into account that price-risk is driven by international markets, while volume-risk depends on local weather and is stage-wise dependent. The methodology is based on setting risk-averse stochastic mixed 0-1 programs, for different contract configurations. These difficult problems are solved with light computational effort, thanks to a robust rolling-horizon approach. The resulting pricing mechanism not only shows how a specific set of contracts will impact the company business, but also provides the manager with alternative contract configurations to counter-propose to the contract seller.

Suggested Citation

  • V. Guigues & C. Sagastizábal & J. P. Zubelli, 2014. "Robust Management and Pricing of Liquefied Natural Gas Contracts with Cancelation Options," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 179-198, April.
    • Handle: RePEc:spr:joptap:v:161:y:2014:i:1:d:10.1007_s10957-013-0309-5
    DOI: 10.1007/s10957-013-0309-5
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    References listed on IDEAS

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