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Valuation of Natural Gas in Salt Cavern Storage Facilities

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Presentation on theme: "Valuation of Natural Gas in Salt Cavern Storage Facilities"— Presentation transcript:

1 Valuation of Natural Gas in Salt Cavern Storage Facilities
Michael Bond Hank Grant PhD

2 Natural Gas Consumption
: 23 Trillion Cubic Feet/Year All US Production 4.6 Tcf Imported Pipeline (Canada & Mexico) Liquid Natural Gas

3 Natural Gas Use

4 Necessity for Storage Other commodities Natural Gas
production is seasonal consumption is relatively level Natural Gas production is relatively level Short term consumption is seasonal Residential – Winter Power generation – Summer (lesser) Investment opportunity

5 Seasonality of Gas Prices

6 Gas In Storage

7 Types of Gas Storage Above Ground Liquid NG Containers
Local distributors To meet local daytime peak usage

8 Types of Gas Storage Underground Depleted gas reservoir Aquifer
Salt Cavern *Mines *Natural caves/caverns * Minor usage

9 Underground Storage Facilities

10 Depleted Reservoir Most common Depleted gas field 1 Turnover/year
24-36 months construction time Structural considerations – Any area with natural gas field

11 Aquifer Very high cushion gas requirement 1 turnover/year
irrecoverable 1 turnover/year Wherever aquifers exist Most expensive

12 Salt Cavern Constructed in salt dome Higher Pressure Least cushion gas
Turnover 4-5/year Longest to construct months Gulf Coast, Great Lakes area

13 Salt Dome Cavern

14 The Lille Torup gas storage facility has seven gigantic cavities ( m by 50-75m) called caverns at a depth of 1.2 and 1.5 km in a large subterranean salt dome.

15 Salt Deposits

16 Compare Salt Cavern with Reservoir Type
Examine operational differences Is there a financial advantage?

17 Approach Set initial parameters For a period of 1 year Gas on hand
Cash on hand For a period of 1 year Generate daily decision to buy, hold or sell Stochastic Estimate future decisions Adjust if necessary Gas cannot exceed capacity Cannot sell gas not on hand Calculate change in gas and cash

18 Approach Create simulation with AWESIM Evaluate results

19 Model - Assumptions No holding costs No injecting/withdrawal costs
Static injection/withdrawal rates Monthly Price changes

20 Model - Parameters Injection time 45 days (V45) Volume=V
Inject rate= R Price = P Cost = C Injection time 180 days (V180) Volume = 4V Inject Rate = R/4

21 Gas prices

22 Performance Trivial pricing Same transactions Equal profit

23 Simple Single Peak Pattern
Most common pattern Winter demand V months inj then 6 months w/d Same profit

24 Various Patterns Same results

25 Initial results Given equal states Equal profits Intuitive
Transaction activity (volume) Knowledge of future prices Equal profits Intuitive

26 Future Prices Difficult to predict the future Forecast Methods
Based on historical Random Variation Mean Reverting Mean Reverting with Spikes

27 Real Options Theory Consider Financial Instruments
Options – to buy or sell stock Potential Business opportunities = Buy Options Ex: Undeveloped Gas Reserve Commodities in storage = Buy or Call Options

28 Black-Scholes - Evaluating options
Current Cost (Spot) Future Price (Strike) Volatility of prices Risk free interest rate (US T-Bills) Time (years) Normal Distribution

29 V180 Injection Pattern Injection season 180 days Withdrawal Season
Low demand Lower prices Summer Withdrawal Season Higher Residential Demand Higher prices Winter

30 Sensitivity to Volatility
Shorter cycle time Take advantage of short-term price spikes

31 V180 vs V45 V45 cf/y greater V45 cost per injected cf lower

32 Summary Continuing to investigate Quantify Salt Cavern advantage
Single Cavern Facility vs Multi-Cavern

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