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Monte Carlo valuation of natural gas investments

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  • Luis M. Abadie
  • José M. Chamorro

Abstract

In this evaluation of energy assets related to natural gas, our particular focus is on a base load natural gas combined cycle power plant and a liquefied natural gas facility in a realistic setting. We also value several American‐type investment options following the least squares Monte Carlo approach. We calibrate mean‐reverting stochastic processes for gas and electricity prices by using data from NYMEX NG futures contracts and the Spanish wholesale electricity market, respectively. Additional sources of uncertainty concern the initial investment outlay, or the option's time to maturity, or the cost of CO2 emission permits.

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  • Luis M. Abadie & José M. Chamorro, 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 10-22, January.
    • Handle: RePEc:wly:revfec:v:18:y:2009:i:1:p:10-22
    DOI: 10.1016/j.rfe.2008.10.002
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    Cited by:

    1. Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
    2. Park, Sun-Young & Yoo, Seung-Hoon, 2013. "The economic value of LNG in the Korean manufacturing industry," Energy Policy, Elsevier, vol. 58(C), pages 403-407.
    3. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," LIDAM Discussion Papers CORE 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Guoming Lai & Mulan X. Wang & Sunder Kekre & Alan Scheller-Wolf & Nicola Secomandi, 2011. "Valuation of Storage at a Liquefied Natural Gas Terminal," Operations Research, INFORMS, vol. 59(3), pages 602-616, June.
    5. Luis M. Abadie, 2009. "Valuation of Long-Term Investments in Energy Assets under Uncertainty," Energies, MDPI, vol. 2(3), pages 1-31, September.
    6. Zhang, Mingming & Tang, Yamei & Liu, Liyun & Zhou, Dequn, 2022. "Optimal investment portfolio strategies for power enterprises under multi-policy scenarios of renewable energy," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    7. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.
    8. Arvesen, Ø. & Medbø, V. & Fleten, S.-E. & Tomasgard, A. & Westgaard, S., 2013. "Linepack storage valuation under price uncertainty," Energy, Elsevier, vol. 52(C), pages 155-164.
    9. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
    10. Pless, Jacquelyn & Arent, Douglas J. & Logan, Jeffrey & Cochran, Jaquelin & Zinaman, Owen, 2016. "Quantifying the value of investing in distributed natural gas and renewable electricity systems as complements: Applications of discounted cash flow and real options analysis with stochastic inputs," Energy Policy, Elsevier, vol. 97(C), pages 378-390.
    11. 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.
    12. Kostrova, Alisa & Britz, Wolfgang & Djanibekov, Utkur & Finger, Robert, 2016. "Monte-Carlo Simulation and Stochastic Programming in Real Options Valuation: the Case of Perennial Energy Crop Cultivation," Discussion Papers 250253, University of Bonn, Institute for Food and Resource Economics.
    13. Zhen, Zaili & Lou, Liyun & Tian, Lixin & Gao, Qibing, 2018. "Investment optimization path of NG power generation in China based on carbon value realization and market linkage," Applied Energy, Elsevier, vol. 210(C), pages 241-255.
    14. Sönmez, Erkut & Kekre, Sunder & Scheller-Wolf, Alan & Secomandi, Nicola, 2013. "Strategic analysis of technology and capacity investments in the liquefied natural gas industry," European Journal of Operational Research, Elsevier, vol. 226(1), pages 100-114.
    15. Pringles, Rolando & Olsina, Fernando & Garcés, Francisco, 2015. "Real option valuation of power transmission investments by stochastic simulation," Energy Economics, Elsevier, vol. 47(C), pages 215-226.
    16. Shaton, Katerina, 2015. "Value of Flexibility in Gas Pipeline Investments," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Kersten, Wolfgang & Blecker, Thorsten & Ringle, Christian M. (ed.), Innovations and Strategies for Logistics and Supply Chains: Technologies, Business Models and Risk Management. Proceedings of the Hamburg Internationa, volume 20, pages 333-357, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.
    17. Josué M. Polanco-Martínez & Luis M. Abadie, 2016. "Analyzing Crude Oil Spot Price Dynamics versus Long Term Future Prices: A Wavelet Analysis Approach," Energies, MDPI, vol. 9(12), pages 1-19, December.
    18. Hieronymi, Philipp & Schüller, David, 2015. "The Clean-Development Mechanism, stochastic permit prices and energy investments," Energy Economics, Elsevier, vol. 47(C), pages 25-36.

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    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G3 - Financial Economics - - Corporate Finance and Governance

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