Storage economics Natural gas storage

1 storage economics

1.1 storage development cost
1.2 storage valuation

1.2.1 cost-of-service valuation
1.2.2 least-cost planning
1.2.3 seasonal valuation
1.2.4 option-based valuation


1.3 effects of natural gas prices on storage

storage economics
storage development cost

as infrastructural investments in energy sector, developing storage facilities capital intensive. investors use return on investment financial measure viability of such projects. has been estimated investors require rate or return between 12 percent 15 percent regulated projects, , close 20 percent unregulated projects. higher expected return unregulated projects due higher perceived market risk. in addition significant expenses accumulated during planning , location of potential storage sites determine suitability, further increases risk.

the capital expenditure build facility depends on physical characteristics of reservoir. first of all, development cost of storage facility largely depends on type of storage field. general rule of thumb, salt caverns expensive develop on bcf of working gas capacity basis. 1 should keep in mind because gas in such facilities can cycled repeatedly, on deliverability basis, may less costly. salt cavern facility might cost anywhere $10 million $25 million/bcf of working gas capacity. wide price range because of region difference dictates geological requirements. these factors include amount of compressive horsepower required, type of surface , quality of geologic structure name few. depleted reservoir costs between $5 million $6 million/bcf of working gas capacity. major cost incurred when building new storage facilities of base gas. amount of base gas in reservoir high 80% aquifers making them unattractive develop when gas prices high. on other hand, salt caverns require least amount of base gas. high cost of base gas drives expansion of current sites vs development of new ones. because expansions require little addition base gas.

the expected cash flows such projects depend on number of factors. these include services facility provides regulatory regime under operates. facilities operate take advantage of commodity arbitrage opportunities expected have different cash flow benefits ones used ensure seasonal supply reliability. rules set regulators can on 1 hand restrict profit made storage facility owners or on other hand guarantee profit, depending on market model.

storage valuation

to understand economics of gas storage, crucial able value it. several approaches have been proposed. include:

cost-of-service valuation
least-cost planning
seasonal valuation
option-based valuation

the different valuation modes co-exist in real world , not mutually exclusive. buyers , sellers typically use combination of different prices come true value of storage. example of different valuations , price generate can found in table below.

cost-of-service valuation

this valuation mode typically used value regulated storage, instance storage operated interstate pipeline companies. these companies regulated ferc. pricing method allows developers recover cost , agreed upon return on investment. regulatory body requires rates , tariffs maintained , publicly published. services provided these companies include firm , interruptible storage no-notice storage services. usually, cost of service pricing used depleted reservoir facilities. if used price, salt cavern formations, cost high, due high cost of development of such facilities.

least-cost planning

this valuation mode typically used local distribution companies (ldcs). based on pricing storage, according savings resulting not having resort other more expensive options. pricing mode depends on consumer , respective load profile/shape.

seasonal valuation

the seasonal valuation of storage referred intrinsic value. evaluated difference between 2 prices in pair of forward prices. idea being 1 can lock-in forward spread, either physically or financially. developers seeking study feasibility of building storage facility, typically @ long-term price spreads.

option-based valuation

in addition possessing intrinsic value, storage may have extrinsic value. intrinsic valuation of storage not take cycling ability of high-deliverability storage. extrinsic valuation reflects fact in such facilities, salt cavern formations, proportion of space can used more once, increasing value. such high-deliverability storage facility allows user respond variations in demand/price within season or during given day rather seasonal variations case single cycle facilities.

effects of natural gas prices on storage

in general see in graph below, high gas prices typically associated low storage periods. when prices high during months of refill season (april–october), many users of storage adopt wait , see attitude. limit gas intake in anticipation prices drop before heating season begins (november–march). however, when decrease not occur, forced buy natural gas @ high prices. particularly true local distribution , other operators rely on storage meet seasonal demand customers. on other hand, other storage users, use storage marketing tool (hedging or speculating) hold off storing lot of gas when prices high.

effects of natural gas prices on storage levels.