IDEAS home Printed from https://ideas.repec.org/p/dui/wpaper/1201.html
   My bibliography  Save this paper

Gas Storage Valuation: A Comparative Simulation Study

Author

Listed:
  • Bastian Felix

    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

Abstract

The purpose of this paper is the comparative analysis of four natural gas storage valuation approaches. In competitive natural gas markets the optimal valuation and operation of natural gas storages is a key task for natural gas companies operating storages. Within this paper, four spot based valuation approaches are analyzed regarding computational time and accuracy. In particular, explicit and implicit finite differences, multinomial recombining trees, and Least Squares Monte Carlo Simulation are compared. These approaches are applied to the valuation of a gas storage facility considering three different underlying price processes. Major characteristics of historical natural gas prices are: seasonality, mean reversion and jumps. Therefore, we consider a mean reversion process as underlying price process. In a first step, we extend this mean reversion process to a mean reversion jump diffusion process, to account for jumps, occurring in historical gas spot price time series. Moreover, we consider a more general price process accounting for mean reversion as well as seasonal patterns as observed in the historical time series. Besides the analysis of the numerical results, the benefits and drawbacks of the methodologies are discussed.

Suggested Citation

  • Bastian Felix, 2012. "Gas Storage Valuation: A Comparative Simulation Study," EWL Working Papers 1201, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Apr 2014.
    • Handle: RePEc:dui:wpaper:1201
    as

    Download full text from publisher

    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1201_GasStorageValuationAComparativeSimulationStudy_19Jun12_BF_EWL_workingpaper.pdf
    File Function: Second version, 2014
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kjarstad, Jan & Johnsson, F., 2007. "Prospects of the European gas market," Energy Policy, Elsevier, vol. 35(2), pages 869-888, February.
    2. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    3. Das, Sanjiv R., 2002. "The surprise element: jumps in interest rates," Journal of Econometrics, Elsevier, vol. 106(1), pages 27-65, January.
    4. Christoph Weber, 2005. "Uncertainty in the Electric Power Industry," International Series in Operations Research and Management Science, Springer, number 978-0-387-23048-1, April.
    5. ,, 2004. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 20(2), pages 427-429, April.
    6. ,, 2004. "Problems And Solutions," Econometric Theory, Cambridge University Press, vol. 20(1), pages 223-229, February.
    7. Petter Bjerksund & Gunnar Stensland & Frank Vagstad, 2011. "Gas Storage Valuation: Price Modelling v. Optimization Methods," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 203-228.
    8. Geske, Robert & Shastri, Kuldeep, 1985. "Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(1), pages 45-71, March.
    9. Mihaela Manoliu, 2004. "Storage Options Valuation Using Multilevel Trees And Calendar Spreads," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 425-464.
    10. Byers, Joe Wayne, 2006. "Commodity storage valuation: A linear optimization based on traded instruments," Energy Economics, Elsevier, vol. 28(3), pages 275-287, May.
    11. Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(4), pages 313-335.
    12. Rene Carmona & Michael Ludkovski, 2010. "Valuation of energy storage: an optimal switching approach," Quantitative Finance, Taylor & Francis Journals, vol. 10(4), pages 359-374.
    13. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    14. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    15. Zhuliang Chen & Peter Forsyth, 2010. "Implications of a regime-switching model on natural gas storage valuation and optimal operation," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 159-176.
    16. Felix, Bastian Joachim & Weber, Christoph, 2012. "Gas storage valuation applying numerically constructed recombining trees," European Journal of Operational Research, Elsevier, vol. 216(1), pages 178-187.
    17. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601, December.
    18. Nicola Secomandi, 2010. "Optimal Commodity Trading with a Capacitated Storage Asset," Management Science, INFORMS, vol. 56(3), pages 449-467, March.
    19. Brennan, Michael J. & Schwartz, Eduardo S., 1978. "Finite Difference Methods and Jump Processes Arising in the Pricing of Contingent Claims: A Synthesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(3), pages 461-474, September.
    20. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    2. Felix, Bastian Joachim & Weber, Christoph, 2012. "Gas storage valuation applying numerically constructed recombining trees," European Journal of Operational Research, Elsevier, vol. 216(1), pages 178-187.
    3. Nemat Safarov & Colin Atkinson, 2016. "Natural gas-fired power plants valuation and optimisation under Levy copulas and regime-switching," Papers 1607.01207, arXiv.org, revised Jul 2016.
    4. Hanfeld, Marc & Schlüter, Stephan, 2016. "Operating a swing option on today's gas markets: How least squares Monte Carlo works and why it is beneficial," FAU Discussion Papers in Economics 10/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    5. Nemat Safarov & Colin Atkinson, 2017. "Natural Gas-Fired Power Plants Valuation And Optimization Under Lévy Copulas And Regime Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-38, February.
    6. Abdullah Almansour & Margaret Insley, 2016. "The Impact of Stochastic Extraction Cost on the Value of an Exhaustible Resource: An Application to the Alberta Oil Sands," The Energy Journal, , vol. 37(2), pages 61-88, April.
    7. 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.
    8. Nadarajah, Selvaprabu & Margot, François & Secomandi, Nicola, 2017. "Comparison of least squares Monte Carlo methods with applications to energy real options," European Journal of Operational Research, Elsevier, vol. 256(1), pages 196-204.
    9. Juri Hinz & Tanya Tarnopolskaya & Jeremy Yee, 2020. "Efficient algorithms of pathwise dynamic programming for decision optimization in mining operations," Annals of Operations Research, Springer, vol. 286(1), pages 583-615, March.
    10. Thompson, Matt, 2016. "Natural gas storage valuation, optimization, market and credit risk management," Journal of Commodity Markets, Elsevier, vol. 2(1), pages 26-44.
    11. Philipp N. Baecker, 2007. "Real Options and Intellectual Property," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-48264-2, July.
    12. Cortazar, Gonzalo & Naranjo, Lorenzo & Sainz, Felipe, 2021. "Optimal decision policy for real options under general Markovian dynamics," European Journal of Operational Research, Elsevier, vol. 288(2), pages 634-647.
    13. Anna Maria Gambaro & Nicola Secomandi, 2021. "A Discussion of Non‐Gaussian Price Processes for Energy and Commodity Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 47-67, January.
    14. Selvaprabu Nadarajah & François Margot & Nicola Secomandi, 2015. "Relaxations of Approximate Linear Programs for the Real Option Management of Commodity Storage," Management Science, INFORMS, vol. 61(12), pages 3054-3076, December.
    15. 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.
    16. Marcelo G. Figueroa, 2006. "Pricing Multiple Interruptible-Swing Contracts," Birkbeck Working Papers in Economics and Finance 0606, Birkbeck, Department of Economics, Mathematics & Statistics.
    17. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    18. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    19. Sebastian Sund & Lars H. Sendstad & Jacco J. J. Thijssen, 2022. "Kalman filter approach to real options with active learning," Computational Management Science, Springer, vol. 19(3), pages 457-490, July.
    20. Meritxell Albertí & Ángel León & Gerard Llobet, 2003. "Evaluation of a Taxi Sector Reform: A Real Options Approach," Working Papers wp2003_0312, CEMFI.

    More about this item

    Keywords

    natural gas valuation; limited liquidity;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dui:wpaper:1201. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Andreas Fritz (email available below). General contact details of provider: https://edirc.repec.org/data/fwessde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.