Process Industries such as Mining, Energy, and Commodity Processing are the historical foundation of the Canadian economy. These industries typically utilize long-lived, expensive and large pieces of infrastructure. The profitability of projects in these industries depends on prices set on world commodity markets, but project operators often have considerable optionality in deciding when to open, close, run, or idle facilities. The question is, how to optimally utilize this operational flexibility and how to value projects in the face of it. The resulting problems are mathematically quite similar to American Options problems from traditional Quantitative Finance, but often involve more complicated modelling around cost structures to idle a run plant or to restart an idled plant. In addition, particularly in rather local energy markets, the impact of idling a plant can significantly impact market prices, leading to interesting multi-player dynamic, or differential, games.

This talk will focus on the mathematical, economic, and financial insights my co-workers and I have found over nearly 20 years of working in this area, in areas including hydroelectric power, to natural gas storage, to corn ethanol production, to shipping of oil and liquefied natural gas.