valuation of natural gas in salt cavern storage facilities
Post on 11-Jan-2016
59 Views
Preview:
DESCRIPTION
TRANSCRIPT
Valuation of Natural Gas in Salt Cavern Storage
Facilities
Michael BondHank Grant PhD
Natural Gas Consumption
1997-2007: 23 Trillion Cubic Feet/Year
All US Production 4.6 Tcf Imported
Pipeline (Canada & Mexico) Liquid Natural Gas
Necessity for Storage Other commodities
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
Seasonality of Gas Prices
Gas In Storage
Types of Gas Storage
Above Ground Liquid NG Containers
Local distributors To meet local daytime peak usage
Types of Gas Storage
Underground Depleted gas reservoir Aquifer Salt Cavern *Mines *Natural caves/caverns
* Minor usage
Underground Storage Facilities
Depleted Reservoir
Most common Depleted gas field 1 Turnover/year 24-36 months construction time Structural considerations – Any area with natural gas field
Aquifer
Very high cushion gas requirement irrecoverable
1 turnover/year Wherever aquifers exist Most expensive
Salt Cavern
Constructed in salt dome Higher Pressure Least cushion gas Turnover 4-5/year Longest to construct 36-48 months Gulf Coast, Great Lakes area
Salt Dome Cavern
The Lille Torup gas storage facility has seven gigantic cavities (200-300m by 50-75m) called caverns at a depth of 1.2 and 1.5 km in a large subterranean
salt dome.
Salt Deposits
Compare Salt Cavern with Reservoir Type
Examine operational differences Is there a financial advantage?
Approach Set initial parameters
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
Approach
Create simulation with AWESIM Evaluate results
Model - Assumptions
No holding costs No injecting/withdrawal costs Static injection/withdrawal rates Monthly Price changes
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
Gas prices
Average Prices 2005-2007
0.00
2.00
4.00
6.00
8.00
10.00
1 2 3 4 5 6 7 8 9 10 11 12
Month
$/M
MB
TU Wellhead
CityGate
Performance
Trivial pricing Same transactions Equal profit
Trivial
0.00
0.50
1.00
1.50
2.00
2.50
1 2 3 4 5 6 7 8 9 10 11 12
Month
$/M
MB
TU
Wellhead
CityGate
Simple Single Peak Pattern
Most common pattern
Winter demand V180- 6 months inj
then 6 months w/d Same profit
Simple Single Peak Pattern
0.001.002.003.004.005.006.007.008.009.00
1 2 3 4 5 6 7 8 9 10 11 12
Month
$/MMC
F
Wellhead
CityGate
Various Patterns
Same results Multi Peak Pattern
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1 2 3 4 5 6 7 8 9 10 11 12
Month$/
MM
CF
Wellhead
CityGate
Initial results
Given equal states Transaction activity (volume) Knowledge of future prices
Equal profits Intuitive
Future Prices
Difficult to predict the future Forecast Methods
Based on historical Random Variation Mean Reverting Mean Reverting with Spikes
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
Black-Scholes - Evaluating options
Current Cost (Spot) Future Price (Strike) Volatility of prices Risk free interest rate (US T-Bills) Time (years) Normal Distribution
V180 Injection Pattern
Injection season 180 days Low demand Lower prices Summer
Withdrawal Season Higher Residential Demand Higher prices Winter
Sensitivity to Volatility
Shorter cycle time Take advantage of
short-term price spikes
Single Peak with Variation
0.001.002.003.004.005.006.007.008.009.00
1 2 3 4 5 6 7 8 9 10 11 12
Month
$/MMb
tu
Wellhead
CityGate
V180 vs V45
V45 cf/y greater V45 cost per injected cf lower
Summary
Continuing to investigate Quantify Salt Cavern advantage Single Cavern Facility vs Multi-Cavern
top related