The Art of Gas Storage Valuation

Deck: 

Benefits and drawbacks of the most popular estimation methods or modeling techniques.

Fortnightly Magazine - March 2006
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

When one tries to model a system, several variables can affect the system’s behavior. The modeler tries to extract a minimal subset of variables that can satisfactorily explain most of the effects under study: in this case, a natural-gas storage facility (NGSF). The question we would like to answer is: What is its value over a fixed time period?

To determine this, we must identify the attributes, or inputs, that are the key determinants of this value, and then determine how the value changes as a function of the inputs.

Before we go about trying to value natural-gas storage, we should try and come up with a list of important considerations in any valuation process. The valuation method should use:

  • Forward prices; and
  • Implied volatilities (instead of historical volatilities);

The method should be able to capture the intricacies of most NGSFs, including:

  • Injection/withdrawal ratchets: In this case, injections and withdrawals depend on inventory levels;
  • Time-based injection/withdrawal and inventory constraints;
  • Injection/withdrawal fuel factors and commodity rates; and
  • Ad Valorem taxes.

Also, the data requirements should be modest, and the calculation time should be reasonable.

The five main methods for valuing storage are:

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.