Joint Merchant Management of Natural Gas Storage and Transport Assets

Natural gas pipeline systems give merchants the ability to trade natural gas across time and geographical markets. That is, these systems embed two types of assets that merchants manage as real options: storage and transport. The current literature has studied the merchant management of these assets in isolation. In contrast, we consider their joint merchant management, which we model as a Markov decision problem (MDP). Due to the intractability of computing an optimal policy of this MDP, we leverage our structural analysis of this model and extend a least squares Monte Carlo method to obtain a heuristic policy, also computing lower and upper bounds on the value of the assets. This heuristic policy performs near optimally on realistic instances. We use this policy and instances to investigate (i) the benefit of the joint merchant management of storage and transport assets; (ii) how to nearly optimally simplify this management; (iii) the value due to price uncertainty and the performance of a reoptimization-based heuristic available in commercial software designed to capture this value, and ways to simplify this approach; and (iv) the value of transport trading across different pipelines. Our research has potential relevance beyond the specific application.