Electricity is a commodity that behaves unlike others in the way that cannot be stored cheaply; its transport depends on existent electrical networks, and can be generated from different sources. This makes the price of electricity highly volatile. As a risk hedging strategy, different financial instruments have been developed, among them, options with electric energy as underlying. We developed a methodology for option pricing in electricity markets, taking into account multi seasonal behavior. Future electricity prices estimation is presented for equatorial countries with similar climate conditions like hydro-dependent energy generation and tropical seasons (e.g. dry season, wet season), affected by El Niño Southern Oscillation. We made a descriptive analysis of the Colombian electricity market. Using mean reversion and mean-reverting jump diffusion models, we made a forecast estimation of intra-day (Hourly) electricity prices based on historical spot data from Colombian electricity market. The models were calibrated and the estimation of derivatives is presented and discussed. We concluded that there is no significant difference between modelling seasonality with dummy variables or with Fourier series.

The COPA group conducts research on a wide range of energy issues. One of the topics is the oil economy, commodity price review and volatility estimation, energy business strategies, risk management, hedging strategy, and regulation of energy industries. Another new area of research focuses on the economics of renewable energy, especially wind, solar and water.

We analyze that International Oil Companies generally maximize the expected net present value of their profits, whereas for National Oil Companies, profits are not necessarily the only objective. Instead, National Oil Companies’ objectives might have a wide range of objectives such as wealth re-distribution, economic development, domestic employment, subsidized domestic fuel price, energy security, royalties and dividends (Shleifer & Vishny, 1994; Hartley & Medlock, 2008; Eller, Hartley, & Medlock, 2011; Hartley & Medlock III, 2013). We develop a production, reinvestment (exploration and recovery) to study the effects of overemployment and domestic fuel subsidies on operations and finance of National Oil Companies. I find that overemployment and domestic fuel subsidies dramatically reduce market value, production, and reinvestment of National Oil Companies.

Contact: Sergio Cabrales

This work presents new evidence on the determinants of privatization of National Oil Companies (NOC) from a panel data of 49 oil-producing countries for the period comprised between 1996 and 2014. We find – ceteris paribus – that countries with greater control of corruption, a perception of high government effectiveness, a more participatory political system, greater regulatory quality, and high efficiency in the execution of contracts and property rights, are more likely to privatize their NOCs, compared with countries that have a lower level in these governance indicators. Likewise, in terms of the control variables, the results of previous studies were ratified regarding the way in which high oil prices negatively influence the probability of privatization of oil companies, while its deviation from the trend and population have a positive effect on these.

Contact: Sergio Cabrales

Is there a bidirectional causal relationship between prices and costs in oil and gas markets? This paper studies the causality between prices and operating and equipment costs in oil and gas industries, using annual indexes (1976-2009). In the oil market, we find a bidirectional Granger causality relationship between prices and operating costs. In contrast, in the gas market, we observe the Granger causality in only one direction, indicating a causality of operating costs on gas prices. Finally, in contrast to operating costs, we do not find a Granger causal relationship between prices and equipment costs in the oil and gas industries.

Contact: Sergio Cabrales

Crude oil and other liquid materials are transported in large quantities through pipelines. Pipelines are an efficient and safe transport way. Nevertheless, loss of containment (LOC) accidents may be caused by external actions of both operational and non-operational nature. Consequences of LOC accidents in pipelines can be efficiently reduced through appropriate design of the general system by defining the installation of sectioning (or blocking) valves at adequate distances. Defining the location and number of valves in a specific pipeline section is a challenging decision due to the countless combinations of these two design components (i.e., where and how many valves). We address the valve location problem using a model for optimal sectioning which assesses the possible location of valves to minimize economic consequences. We present a case study for sectioning in a Latin-American pipeline, characterized by several changes in altimetry and the presence of urban and suburban populations. The results show reductions on the order of 10%-18% of the total expected cost of economic consequences compared with the sectioning carried out under the current guidelines of pipeline design included in the CSA Z662 norm. The resulting valve configurations cover zones with different combinations of area and high consequence area types, reducing economical losses for both expected.

Contact: Sergio Cabrales