Robust management and pricing of liquefied natural gas contracts with cancelation options

Abstract

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