Robust management and pricing of LNG contracts with cancellation options

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

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