Cracking the complexity code in the global energy industry
Last modified: September 5, 2007
Valuation of assets and corporate portfolios in the natural gas industry has been traditionally performed through linear, static modeling tools. These tools reinforce the notion of the value chain (around which some companies incorporate real options for valuation), even though it is readily apparent that the system is really a dynamic network, or more correctly a complex network comprised of many interlocking portfolios of networks. Given the significant complexity of the gas industry, and the emergence of a progressively connected global market, it is increasingly important to recognize this system as an integrated network, instead of a simple collection of assets and chains. For example, linearly optimizing a chain or portfolio without considering competitors’ responses, or valuing an asset without considering its linkages with its counterparts, is not only insufficient but significantly underestimates the value of the network and individual strategic-assets. A network perspective of global gas activities and various nonlinear phenomena have to be addressed to exploit the underlying complexity and understand the dynamic behavior of this industry.
The novel concept of complex networks has been applied in our recent studies of the global gas industry, particularly in LNG. A proprietary model has been developed which employs a fully integrated dynamic network with over 400 nodes representing commercial assets, companies, contracts and markets and containing more than 2000 parameters, all of which interact. Around each node, market mechanisms and corporate behaviors are at work, yet it is the interaction of these local agents with their environment that creates high nonlinearity and rich dynamics in global gas trading flows. This tool has been used to perform network analysis of several leading energy companies’ portfolios to understand the potential for innovative optimization and value-creation strategies. The tool can additionally be used to model the dynamic evolution of LNG flows and swaps, globally and within defined ‘basins’, and the identification of which assets are true control points and why. More broadly, the concept of complex networks has extended implications in other energy sectors including upstream and downstream, as well as in geopolitics, and organizational dynamics.