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Gas Storage
Figure 4: Explanatory Power of Consecutive
Principal Components
curveandshouldprovidesufficientdetailforasimulation
of forward curve dynamics using the Monte Carlo
technique.
Repeated dynamic optimisation
We now have today’s forward curve with seasonal
information,togetherwithinformationaboutthepossible
dynamics of the curve in the future. A further
improvement of the effectiveness of the model, and
reduction of risk though lowering the standard deviation
of returns, can be achieved by daily reassessing the
Source: Viz Risk Management
intrinsic operational plan. The benefit of daily
reassessment of the optimisation steps on the basis of a new conditional on today’s forward curve and the expected price
forward curve are described by Bjerksund, Myksvoll and dynamics derived from the principal component analysis and
Stensland in 2008 in their paper about flexible load contracts operational constraints. For this new forward curve, the
and by Maragos in 2002 – see references. intrinsic plan for the second day of operation is determined.
Webeginwiththeinitialforwardcurveandfindtheintrinsic This procedure is continued until the last day of the
plan for the first day of operation which results in one of three optimisationandthefinalfillingstateofthestorageisreached.
decisions given current market prices and operational
characteristics:
This approach has proven itself in daily
1. Fill: The volume of the gas in the storage is increased,
operations by customers ... and requires
incurring cost at the current spot price.
2. Extract: The volume of the gas in the storage is decreased,
the PCA analysis to be updated on a
incurring revenue at the current spot price. regular basis
3. Do Nothing: Volume remains the same (no cash flow).
Next, we simulate possible forward curves for tomorrow, The value of storage is given by the average NPV of the
simulated daily cash flows. Following this approach should
References:
allow companies to capture around 90% of the maximum
1. Boogert, Alexander and Cyriel de Jong: Gas Storage Valuation Using a
Monte Carlo Method. Journal of Derivatives, Spring 2008, pp. 81-98.
storage value given by the ‘perfect hindsight’ analysis.
2. Bjerksund, P., Rasmussen, H., and Stensland, G.. Valuation and risk
Thismethodologyhasalsobeenappliedsuccessfullytoother
management in the Norwegian electricity market. Discussion paper optimisation problems such as those arising from take or pay
20/2000, Norwegian School of Economics and Business
Administration.
contracts or generation assets.
3. Fred Espen, Steen Koekebakker and Fridthjof Ollmar (2005):
This approach has proven itself in daily operations by
Extracting and applying smooth forward curves from average based
customers of Viz Risk Management and requires the PCA
commodity contracts with seasonal variation, Centre of Mathematics for
Applications, University of Oslo and Agder University College, School
analysis to be updated on a regular basis (e.g. once a month).
of Management.
These customers use Elviz ETRM for the assessment of positions
4. Maragos, S. 2002. Valuation of the operational flexibility of natural gas
and risks resulting from complex portfolios of assets and
storage reservoirs,E.Roon,ed. Real Options and Energy Management Using
Options Methodology to Enhance Capital Budgeting Decisions, Risk Books,
instruments, as well as standard traded instruments across
London, UK, pp. 431-456.
markets. Viz Risk Management customers range from
5. Petter Bjerksund, Gunnar Stensland and Frank Vagstad (2008): Gas
Storage Valuation: Price Modelling v. Optimization Methods. Discussion
traditional utilities to international energy companies, oil
paper 20/2008, Norwegian School of Economics and Business majors, hedge funds and financial institutions.

Administration.
6. Petter Bjerksund, Bjarte Myksvoll, and Gunnar Stensland: Exercising
flexible load contracts: Two simple strategies, April 2008, Applied
Sebastiaan Vallinga is Sales and Marketing Director at Viz
Stochastic Models in Business and Industry, 24, pp. 93-107.
Risk Management, a leading provider of ETRM software
7. Vincent Kaminski, Youyi Feng, James Pang: Natural Gas Storage
solutions in Europe. Viz Risk Management customers range
Assets: Value, Trading Strategy and Financial Investment. Jesse H. Jones
Graduate School of Management, Rice University, USA, Department of
from traditional utilities to international energy companies,
System Engineering and Engineering Management, Chinese University
oil majors, hedge funds and financial institutions.
of Hong Kong, Hong Kong, China, Department of Mathematics and
Statistics. University of Calgary, Alberta, Canada, 2008.
www.viz.no
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