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. Also, the data requirements should be modest,...
The New Gas Wisdom
Unconventional gas sources put a ceiling on future prices.
In the energy sector, price forecasts are generally every bit as good at predicting the recent past as they are spectacularly bad at predicting the future. This is especially true in the case of natural gas in the United States. Over the past several years, the industry consensus on the outlook for natural gas swung from one extreme to the other, and then back again. Forecasters of all types—from government, to Wall Street, to the gas and power industries—exhibited the classic bias of placing excessive weight on recent history. Forecasters into the mid 1980s continued to project a return to the higher prices of the late 1970s, resulting in consistently overestimated price forecasts. By the next decade, the opposite tendency was in evidence, with the actually realized lower gas prices projected indefinitely into the future. Predictably, this led to some substantial underestimates of prices, as well as some rather shrill contrarian warnings of extremely high prices and domestic shortages to come. Neither was correct. Finally, over the past few years, industry and forecaster views apparently capitulated to the recent years’ high gas prices, and started projecting higher prices into the future, similar to the forecasts from two decades ago. Each forecast era shared similar traits—historical bias, static analysis and a limited fact base. Any which way it’s cut, price forecasts, particularly market forwards, have been widely unreliable in predicting gas prices (see Figure 1) .
These gyrating price forecasts, however, did serve a purpose. They provided signposts for counter shifts (inflections) in industry structure and dynamics. Since the start of this decade, conventional wisdom on gas has shifted from one of unconstrained (conventional) domestic gas supply to one where prices would be set by international imports of liquefied natural gas (LNG), with U.S. prices reflecting the global LNG and oil market. Now, a new era of domestic abundance is being proclaimed by many on the assumption of abundant unconventional gas. 1 Throughout this period, we note the growing importance of trends in the U.S. natural gas sector for both the U.S. power sector, as well as the evolution of the global natural gas industry. This trend only will grow in significance.
There is an evolving debate around the prospects for U.S. gas supply and prices. But what does the latest, emerging consensus on the U.S. gas sector—namely, a massive upward revision in the size of economically accessible unconventional gas supplies—mean for the gas market, including implications for power and the global gas market? We’ll attempt to resist the temptation to get tricked by the static, extrapolation bias. Instead, it is important to focus on fundamentals by identifying which factors likely will define the next gas ‘era’ in North America (see Figure 2) .