Gas procurement optimization for a retailer

Categories: Oil & Gas, Risk Management
  • Situation

    A Dutch gas retailer has a 4 bcm gas portfolio of residential, small businesses and industrial customers. Based on the sales channels estimates at year end, it procured gas from the incumbent to satisfy its portfolio needs.

  • Complication
    The incumbent packages gas with transportation, flexibility and other risk protection products, and offers an oil-indexed pricing. The retailer can also buy directly from the futures gas market at a cheaper price, but needs to source transport and flexibility separately.
  • Solution
    We conducted a risk-return comparative analysis for both alternatives and proposed a strategy for optimal portfolio allocation amongst different procurement options, with suggestions of optimal times and volumes to source gas during the year. This resulted in cost savings of €40 millions in the first year of implementing the new strategy.
[title_pink bottom_margin="20" small_text=""]More details[/title_pink] [accordion style="2"] [toggle title="Content"] [row] [/row] [/toggle] [toggle title="Current market situation for most gas retailers "] [row] [/row] [/toggle] [toggle title="What are your options in gas sourcing?"] [row]
The risk/reward trade-off: what is cheaper ? what are the risks ?
[/row] [/toggle] [toggle title="What are your main risks & opportunities in gas sourcing?"] [row] [su_table]
 

Regional Oil-IC

Long-term gas contracts

Third party

Segment

Retail B2B

Various
Reference market is TTF

Price components

  • Commodity cost
  • Service cost (includes flex cost)
  • Commodity cost
  • Service cost (includes flex cost)
  • Commodity cost
  • Flex cost
  • Imbalance cost
  • Quality conversion
  • Seasonal/weather risk

Transport included?

Yes Yes

No

Flexibility included?

Yes Yes

No

Temperature protection?

Yes

Yes / No

No

Main advantages

  • Includes significant flex
  • Provides full weather protection
  • Usually cheaper than Regional
  • Provides some flex and possible weather protection
  • Often the cheapest option
  • Full flexibility on resale, destination, storage, etc.

Main disadvantages

  • Typically most expensive
  • Cannot be resold
  • Strict destination rules, leaving buyer with little flexibility
  • Cannot be resold
  • Strict destination rules, leaving buyer with little flexibility
  • Requires access to flex
  • No weather protection
[/su_table]
Estimating risk in both gas sourcing options
[/row] [/toggle] [toggle title="Estimating risk in both gas sourcing options"] [row] [/row] [/toggle] [toggle title="How to optimize the purchasing strategy? (1/2)"] [row]
An optimal gas procurement strategy consists of taking advantage of the favorable spread between TTF and Oil-IC by purchasing as much third-party gas as access to flex capacity allows (either on the market or through own storage).
What is your risk appetite?
[/row] [/toggle] [toggle title="How to optimize the purchasing strategy? (2/2)"] [row]
  • In order to optimize your purchasing strategy, the following has to be assessed as well:
    • What is your risk appetite?
    • Which mixture of sourcing between market and provider is optimal for your firm?
The model accordingly suggests different purchasing strategies based e.g. on the RAROC indicator
How does it work in practice?
[/row] [/toggle] [toggle title="How does it work in practice?"] [row] [/row] [/toggle] [toggle title="The procurement strategy is based on a two-stage optimization (1/2)"] [row]

Yearly procurement optimization

[/row] [/toggle] [toggle title=" The procurement strategy is based on a two-stage optimization (2/2)"] [row]

Intra-year procurement optimization

[/row] [/toggle] [toggle title="Taking advantage of dynamic spread "] [row]
How does the model perform in real life?
[/row] [/toggle] [toggle title="How does the model perform in real life?"] [row]
What are the lessons learned?
[/row] [/toggle] [/accordion]

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