Natural gas storage valuation and optimization under time-inhomogeneous exponential Lévy processes

ABSTRACT

We analyse a stochastic control problem for the valuation of a natural gas storage facility while taking into account operating characteristics. The underlying natural gas spot price dynamics is assumed to follow a time-inhomogeneous exponential Lévy process [4]. This underlying incorporates common features of gas spot prices such as seasonality, mean-reversion and price spikes with seasonal jump intensities. The corresponding HJB equation is the nonlinear PIDE which is solved by an explicit finite difference method for the special case where the model is driven by a time-dependent compound Poisson process. The numerical approach gives us both the value of the storage facility and optimal operating strategy depending on the gas price, current level of gas in the storage and time. The effects of seasonality and seasonal jump intensity are investigated by observing the surfaces of control strategies and contract values.

KEYWORDS:

• Gas storage
• stochastic control
• HJB equation
• independent increment process
• mean-reversion

2010 AMS SUBJECT CLASSIFICATIONS:

• 35Q93
• 35R09
• 49M25
• 60G51
• 65C20

Disclosure statement

No potential conflict of interest was reported by the authors.