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Gas storage valuation : price modelling v. optimization methods

Bjerksund, Petter; Stensland, Gunnar; Vagstad, Frank
Working paper
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URI
http://hdl.handle.net/11250/163949
Date
2008-10
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  • Discussion papers (FOR) [556]
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.
Description
This version: September 26, 2008
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2008:20

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