Gas Storage Valuation: Price Modelling v. Optimization Methods

32 Pages Posted: 23 Oct 2008

See all articles by Petter Bjerksund

Petter Bjerksund

Norwegian School of Economics (NHH) - Department of Business and Management Science

Gunnar Stensland

Norwegian School of Economics (NHH) - Department of Business and Management Science

Frank Vagstad

Viz Risk Management Services AS

Date Written: October 17, 2008

Abstract

The existence of a financial gas market motivates the analysis of gas storage as a separate asset, using the market value context for utilization and valuation. In the recent literature, gas storage is typically analysed within a framework with a simple one-factor price dynamics that is solved to optimality. We follow a different approach, where the market is represented by a forward curve with daily granularity, the price uncertainty is represented by six factors, and where we impose a simple and intuitive storage strategy that follows from repeated maximization of the intrinsic value.

Based on UK natural gas market price data, we obtain the gas storage value using our approach, and compare with results from one-factor models as well as with perfect foresight. We find that our approach captures much more of the true flexibility value than the one-factor models. Our results indicate that the appropriate framework for analyzing complex assets like gas storage is a rich representation of the price dynamics combined with a simple and intuitive decision rule.

Keywords: Energy, uncertainty, flexibility, exercise strategy

Suggested Citation

Bjerksund, Petter and Stensland, Gunnar and Vagstad, Frank, Gas Storage Valuation: Price Modelling v. Optimization Methods (October 17, 2008). NHH Dept. of Finance & Management Science Discussion Paper No. 2008/20. Available at SSRN: https://ssrn.com/abstract=1288024 or http://dx.doi.org/10.2139/ssrn.1288024

Petter Bjerksund (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Gunnar Stensland

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Frank Vagstad

Viz Risk Management Services AS ( email )

P.B 6216
Bergen, NO-5893
Norway

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