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Robust management and pricing of LNG contracts with cancellation options

Vincent Guigues (vguigues***at***impa.br)
Claudia Sagastiz√°bal (sagastiz***at***impa.br)
Jorge Zubelli (zubelli***at***impa.br)

Abstract: Liquefied Natural Gas contracts offer cancellation options that make their pricing difficult, especially if many gas storages need to be taken into account. We develop a valuation mechanism for such contracts from the buyer's perspective, a large gas company whose main interest in these contracts is to provide a reliable supply of gas to its clients. 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 stagewise dependent. The methodology is based on setting risk-averse multistage 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.

Keywords: Stochastic Programming; Risk Aversion; CVaR; LNG Contracts Management; Rolling Horizon

Category 1: Applications -- OR and Management Sciences


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Entry Submitted: 09/14/2011
Entry Accepted: 09/14/2011
Entry Last Modified: 12/18/2012

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