LNG VALUATION
Figure 2: Nodal View of an Atlantic Basin LNG Portfolio
The nodes represent different
production sources and destination markets. Production and demand assets can exist at different nodes and the flow between nodes is constrained by transport capacity (e.g. pipeline or LNG regas). Finally production cost, supply contract terms, hub price signals and retail portfolio pricing characteristics can be overlaid. The advantage of this approach
is that it provides a structured and transparent view of the value of flexibility in moving gas across the portfolio. For a relatively low initial effort the nodal approach can pay big dividends in helping to understand portfolio exposures and how incremental investments may unlock portfolio value. The other great benefit of starting with a nodal view is that the structure provides a solid foundation for developing a more sophisticated portfolio optimisation and valuation model.
Source: Timera Energy
complex nature of the analytical problem lends itself to a staged approach that can evolve as the portfolio grows. Each stage should add value to commercial decision making as it is developed. In other words the capability evolves as a result of commercial requirements to analyse portfolio value (e.g. to assess new supply contracts or upstream investment opportunities). Each stage should also
Stage 2: Developing a Simple Portfolio Model
The limitation of the Stage 1 nodal source to destination analysis
is that it lacks analytical
firepower. It does not fully capture how portfolio components interact with each other and the market. Developing this capability is the focus of the second stage. Typically this will involve developing a model
When it comes to LNG portfolio value, the ‘whole’ does not equal the ‘sum of the parts’
build on the last to reduce the risk of inadvertently overlooking
key
problem. The staged approach is represented in Figure 1 and explained below.
Stage 1: Source to Destination Analysis Price spreads are the key driver of LNG portfolio
value. So developing a ‘top down’ analytical view of the value of production and destination pairings is a logical place to start. In order to do this it is useful to build a nodal view of the portfolio. This is illustrated in Figure 2 which provides a simplified network view of a hypothetical LNG portfolio centred around the Atlantic basin.
78 March 2013 features of the portfolio or
that optimises LNG portfolio flexibility at current market prices (in essence calculating the intrinsic value of the portfolio). As well as providing information on asset value, this also allows calculation of the cost
of particular portfolio constraints (e.g. limited supply flexibility or access to shipping capacity), and is particularly useful for determining where to prioritise portfolio development and origination activities.
Stage 3: Developing a Full Stochastic Portfolio Model
The final stage of development focuses on
capturing the uncertainty around the evolution of market driven risk factors. The key incremental benefit of this stage is to gain a better understanding of the extrinsic value of portfolio flexibility. Evolving the portfolio valuation model from
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