In today’s world, the security, economic prosperity and social well being of any economy depend on a complex system of interdependent infrastructures. Key among these is the energy infrastructure, the electric power, oil, and natural gas production, transmission, storage, and distribution systems – large and small – that fuel and power the economy. Energy markets operate in an environment exposed to a variety of risks responsible for the high volatility of the prices of oil, natural gas, electricity and freight rates. The need to control this price volatility has prompted the development of valuation and risk management methods for energy assets and their derivatives analogous to those widely used in the fixed income, equity and foreign exchange markets.
Also, the process of deregulation in energy markets changes the market from a monopoly into a complex one, in which large utilities and independent power producers are no longer suppliers with guaranteed returns but enterprisers, which have to compete. This competence has forced utilities to improve their efficiency. In effect, they must still manage the challenges of physical delivery while operating in a complex market characterized by significant volatility, volumetric uncertainty and credit risk. In such an environment, risk management gains more importance than ever.
The report analyzes recent developments in this field emphasizing quantitative methods and their application in energy and shipping. Stochastic models for the spot price of oil, natural gas and electricity and of their futures curves are reviewed. The pricing of vanilla and exotic derivatives for jump-diffusions is discussed using recent valuation methods based on complex characteristic functions and Fourier integration. Recent analytical results in stochastic optimal control theory are reviewed and their use is proposed for the solution of a number of complex risk management problems involving portfolios of energy assets and their derivatives.
Applications discussed include the valuation of storage facilities for natural gas, oil and
other fuels, the optimal operation of flexible hydrocarbon reservoirs, the hedging of fuel
costs in the transportation and energy sectors, the valuation of seaborne energy cargoes –
oil, products, LNG – transported in tankers, the fuel efficient navigation and weather routing of shipping fleets, the valuation and hedging of power plants and refineries, the pricing of credit risk and derivative securities in shipping and the valuation of electricity storage facilities for offshore wind farms. Further, a checklist has been included to provide some general guidance and a starting point so that energy facilities are able to identify their critical functions and assets, become aware of threats and vulnerabilities, evaluate and rank the threats in terms of the incidents they may cause, and initiate a security enhancement program, if appropriate.
View Table of ContentsPages: 65
Publication Date: July 2008
Publisher: Energy Business Reports
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