Seminario Dottorato: Modeling and valuing make-up clauses in gas swing contracts

Wednesday 15 February 2012 - Enrico Edoli

ARGOMENTI: Seminars Ph.D. Program

Wednesday 15 February 2012 h. 15:00, room 2BC30
Enrico Edoli (Padova, Dip. Mat.)
"Modeling and valuing make-up clauses in gas swing contracts"

Europe is among the largest consumers of natural gas in the world, but has a very limited domestic production compared to its consumption. The excess demand is covered by massive natural gas imports from foreign producer countries like Russia and Algeria. Swing contracts, also known as take-or-pay, are long term supply contracts with a quite standard structure which, basically, permits flexibility of delivery.
In the last 10 years, thanks to the worldwide energy liberalization process, the birth of competitive gas markets and the recent financial crisis, those kind of traditional long term swing contracts in Europe have been supplemented in a significant way by make-up clauses which allow postponing the withdrawal of gas to future years when it could be more profitable. This introduces more complexity in the pricing and optimal management of swing contracts.
This talk is devoted both to an introduction on swing contracts and to a proper quantitative modelization of make-up clauses.
More in detail, we succeed in building an algorithm, based on dynamic programming, to price and optimally manage a swing contract with make-up clause. After having described the dynamic programming equation for problem, we prove that this problem has a quadratic complexity with respect to the number of years. Then, as an example, we show the algorithm at work on a 3-year contract and we present a sensitivity analysis of the price and of the make-up policy with respect to various parameters relative both to the price dynamics and to the swing contract.

Rif. int. C. Marastoni, T. Vargiolu

Download Seminario Dottorato