An inventory control policy for liquefied natural gas as a transportation fuel

In this paper, we study a novel stochastic inventory management problem that arises in storage and refueling facilities for Liquefied Natural Gas (LNG) as a transportation fuel. In this inventory problem, the physio-chemical properties of LNG play a key role in the design of inventory policies. These properties are: (1) LNG suffers from both quantity decay and quality deterioration and (2) the quality of on-hand LNG can be upgraded by mixing it with higher-quality LNG. Given that LNG quality can be upgraded, an inventory control policy for this problem needs to consider the removal of LNG as a decision variable. We model and solve the problem by means of a Markov Decision Process (MDP) and study the structural characteristics of the optimal policy. The insights obtained in the analysis of the optimal policy are translated into a simple, though effective, inventory control policy in which actions (i.e., replenishment and/or removal) are driven by both the quality and the quantity of the inventories. We assess the performance of our policy by means of a numerical study and show that it performs close to optimal in many numerical instances. The main conclusion of our study is that it is important to take quality into consideration when design inventory control policies for LNG, and that the most effective way to cope with quality issues in an LNG inventory system involves both the removal and the replenishment of inventories.