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