11-12 November, 2013, Amsterdam

HOW TO USE STORAGE AND TAKE-OR-PAY CONTRACTS

Gas Market Flexibility Instruments

Cyriel De Jong, KYOS Energy ConsultingCourse Leader

This two day course on fl exibility instruments in the natural gas market focuses mainly on gas storage, swing and take-or-pay contracts.

A summary of the courseThe purpose of the course is to provide a better understanding of fl exibility instruments, their value drivers, risk factors, portfolio management, trading and hedging strategies.

In the course we will study how fl exibility instruments fi t 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 oil indexation, penalty structures, period quantity constraints, make-up and carry-forward rights.

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Who should attend?The course aims to attract a wide range of people active in the natural gas value chain, including energy traders, asset developers, portfolio and risk managers, energy market analysts, regulators and consultants.

The course does not require any in depth knowledge of specifi c areas. The instructors will present technical details in an intuitive and understandable manner, ensuring the course remains appealing and clear both to quantitative and non-quantitative people.

Case study and trading gameThe course is highly practical. Several case studies will be worked out using specialized analysis models for storage and swing (Take-or-Pay) contracts. The models will be provided for the duration of the course and a month thereafter.

Apart from case studies, the course also features an energy trading game. The goal is to optimize a portfolio of energy customers while trading in the market and optimizing the storage and swing products.

Gas Market Flexibility Instruments

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Agenda - Day one 9.00 - 17.00 Course sessions

Session 1: European gas markets, storages and contract structures

▶ Overview European gas markets and trading hubs ▶ Traditional use of fl exibility instruments in a portfolio:

▷ Seasonal: summer – winter demand variations ▷ Peak shaving ▷ Typical injection/release patterns

▶ 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 fi nancial storage

▶ Understanding the forward curve: interaction between 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-fl ow valuation model for a storage investment

▶ Rolling intrinsic valuation: comparison of diff erent ‘rolling’ strategies

▶ A storage as a basket of time-spreadsForward 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

Registration: 8.30 - 9.00

Coff ee breaks included in morning and afternoon. Lunch is scheduled from 12.30-13.30.

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Agenda - Day two 9.00 - 17.00 Course sessions

Session 3: 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: defi nition 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 ▷ Benefi ts of simulations ▷ Extension of this approach to storage and swing valuation

Session 3: Practical application of valuation and trading concepts

▶ Comparing intrinsic value with rolling intrinsic and full option value

▶ Trading strategy assumptions behind the diff erent 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

Registration: 8.30 - 9.00

Coff ee breaks included in morning and afternoon. Lunch is scheduled from 12.30-13.30.

Before Cyriel de Jong foundedKYOS, he was assistant professor atErasmus University. Since 2001 hehas been a trainer in energy marketsmainly focusing on fi nancial riskmanagement and energy fi nance. Cyriel has done a great number ofprojects related to energy derivativevaluation, risk management andinvestment analysis (including realoptions). He is particularly active inthe application of fi nancial simulationmethodologies to value power plants,gas storages, long-term contracts, andtransportation. Cyriel holds an MScin Econometrics from the Universityof Maastricht and a PhD in Financial Derivatives from Erasmus University.

“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 Trading) at Trianel Gmbh

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

Cyriel de JongPartner, KYOS Energy Consulting

Reviews:

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LANGUAGEThe workshop will be delivered in English.

DATE 11-12 November, 2013, Amsterdam, The Netherlands

SCHEDULEEach day starts at 09.00 and finishes at 17.00hrs.

REGISTRATIONhttp://www.energy-expert-network.com/coursesE-mail: Johanna.Oberg@energy-expert-network.comPhone:+46 (0) 85 333 2599

FEESEarly Bird 2225€ (register before 30 September) + Dutch VATStandard price 2475€ + Dutch VAT

MULTIPLE REGISTRATION DISCOUNTRegister two or more people from the same companyand get a 10% discount per person.

FOOD AND BEVERAGEFood and beverages will be provided to theparticipants during the day. Specific wishes can besubmitted to the organization.

LAPTOPProvided the character of the workshop participantsare required to bring a laptop, which has installed MSExcel.

DOCUMENTATIONParticipants receive documentation, calculations andexercises in a manual.

ABOUT THE ORGANIZERS

ENERGY EXPERT NETWORKThe Energy Expert Network is a network of experts and hands-on energy market participants that provides companies with tailored courses.

The Energy Expert Network consists of the ‘best of the best’ industry experts, well known for their knowledge and experience in teaching energy industry professionals. Energy Expert Network also provide open courses on fixed dates in co-operation with external experts.