Gas Market Flexibility Instruments

Amsterdam, The Netherlands
Fall 2016



This two day course on flexibility instruments in the natural gas market focuses mainly on gas storage, swing and take-or-pay contracts and to a lesser degree on transportation and LNG. The purpose of the course is to provide a better understanding of flexibility instruments, their value drivers, risk factors, portfolio management, trading and hedging strategies.

In the course we will study how flexibility instruments fit into a company's portfolio to manage variations in demand. You will learn how to value the instruments, use them in a portfolio of products and assets, and develop trading and hedging strategies around them. The course explains a number of contract structures, which include gas and oil indexation, penalty structures, period quantity constraints, make-up and carry-forward rights.


Course Highlights

• Insights into gas storage & swing contract valuation approaches

• Principles of delta hedging, and implementation of hedge strategies

Analyse different trading strategies with a practical back-test


Who should attend?

The course aims to attract a wide range of people active in the energy and financial sector including energy traders, asset developers, portfolio and risk managers, energy market analysts, regulators and consultants.

The course does not require any specific pre-knowledge. The instructors are used to present technical details in an intuitive manner,  appealing to people with a quantitative and non-quantitative background.



Session 1:

European gas markets, storages and contract structures

       Overview European gas markets and trading hubs

       Traditional use of flexibility instruments in a portfolio

            Seasonal: summer - winter demand variations

            Peak shaving

            Typical injection/release patterns

       Overview of swing / Take-or-Pay contracts

       Overview of gas storage assets

            Overview of European gas storages

            Primary parameters: Injection, withdrawal, working gas volume

            Pricing of storages in the German market

       Overview of swing/Take-or-Pay contracts

            Variable contract volume, with Take-or-Pay constraints

            Annual and other period constraints

            Indexed strike prices with monthly lagging and averaging

            Hard and soft penalties for violation of constraints

           Carry-Forward and Make-Up rights


Session 2:

Storage valuation: Trading forwards in a dynamic hedging strategy

       Overview valuation approaches to physical and financial storage

       Understanding the forward curve : interaction between the storage costs and forward prices

       Forward curve building: from a curve of tradable contracts to a smooth daily  expected  curve

       Understanding intrinsic value

       Daily intrinsic, monthly intrinsic or tradable intrinsic

       Incorporation of liquidity and trading costs

       Impact of storage constraints

       Developing a cash-flow valuation model for a storage investment

       Rolling intrinsic valuation: comparison of different 'rolling' strategies

       A storage as a basket of time spreads

Forward curve modeling and simulation

       Forward curve dynamics

            Spot versus forward price dynamics

            The volatility term structure

            Elements of a multi factor model: short-term, long-term and winter-summer spread uncertainties

       Correlation and co-integration between gas and oil prices

            Implications for the valuation of gas contracts with indexed strike prices


Session 3:

Option valuation of storage and swing
Gas price dynamics (focus on spot)

       Short intro option theory and real options in energy markets

       Primary price dynamics in natural gas markets

       Volatility levels and estimation procedures for spot and forward prices

            Historical versus implied volatility

            Moving average and Exponentially Moving Average volatility

       Mean reversion rate: definition and estimation approaches

            What history to use for mean-reversion and volatility?

            Seasonal patterns in volatility and mean-reversion

Option valuation of storage and Take-or-Pay contracts

      The tree approach for valuation of an American-style option:

            Setting up the tree consistent with market volatility

            Backward induction

            Forward valuation

      The least squares Monte Carlo approach for valuation of an American-style option

            Similarity with tree approach

            Benefits of simulations

            Extension of this approach to storage and swing valuation


Session 4:

Practical application of valuation and trading concepts

       Comparing intrinsic value with rolling intrinsic and full value option value

       Trading strategy assumptions behind the different valuations

            Impact of market liquidity constraints

            Impact of uncertainty about volatility and mean-reversion

            Interpreting the delta hedges

      Guidelines for setting up a backtest

            Impact of changing volatility, forward curve shapes and mean.reversion over time

            Comparing initial values with realized values

            Comparing 'optimal' storage injections/withdrawals with actual operator behavior


Reviews from previous delegates:

 I highly recommend this course as it gives insights into the product complexity in both a quantitative and economic approach. It brings a strong understanding of the challenges and proposes clear solutions. I appreciated the openness of the teachers towards their proprietary models and their eagerness to take discussions into the details.  - Roberto Frassanito, Energy Structured Management, CW&CEE at EGL Trading AG

 If you are starting out with building a storage model, or indeed just want to know a little more about the models that are used in the Gas industry, I would highly recommend this course to you. The accompanying material is a valuable resource to have at your disposal, while the course is useful, run by nice guys, in a great location - what more can you ask for?  - Ben Evans, Quant Trading at WINGAS GmbH

 The course was very interesting and everything was well organized. I would recommend it. - Alice Sozzi, Gas Risk Controlling at E.ON


Course leader:

Cyriel de Jong, Partner, KYOS Energy Consulting

Before Cyriel de Jong founded KYOS, he was assistant professor at Erasmus University. Since 2001 he has been a trainer in energy markets mainly focusing on financial risk management and energy finance. Cyriel has done a great number of projects related to energy derivative valuation, risk management and investment analysis (including real options). He is particularly active in the application of financial simulation methodologies to value power plants, gas storages, long-term contracts, and transportation. Cyriel holds an MSc in Econometrics from the University of Maastricht and a PhD in Financial Derivatives from Erasmus University.


Early Bird Price:  2225 EUR (excl. VAT) Register before 31 August

Standard Price:  2475 EUR  (excl. VAT)

Multiple registrations from the same company get a 10% discount per person

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