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.
What would this entail? Such an environment would not just spell disappointing performance for the owners of the liquefaction capacity, but also create the conditions for the emergence of a significant spot market in LNG. Today, the spot market only represents 10 percent to 15 percent of total LNG sales. However, a back-of-the envelope calculation comparing planned capacity and potential changes in net demand based on the unconventional-gas story above suggests the spot share of the market could grow significantly. There was a similar phenomenon in the U.S. petroleum refining and marketing market in the 1980s, when excess refinery capacity led both to unhealthy spreads, as well as the emergence of a spot market. Given existing excess capacity, owners of liquefaction would be hard pressed to pass up the opportunity to sell excess product on the market at a price at, or above, their marginal cost, rather than insisting on long-term contracts tied to the price of petroleum. In this scenario, we’re back to the simple world of potential LNG prices of ~$5 to $6/MMBtu delivered to the United States. These prices would reflect the long-run marginal price of the LNG, rather than the much higher price of the substitute for natural gas, crude products. Note that one could get to the same delivered LNG price even in a world without excess liquefaction capacity, but only with crude oil around $35/barrel—laughably low a few months ago—but close to many of the majors’ longstanding planning assumptions just a few years back.
Finally, if the reader struggles to believe the world will overshoot its liquefaction capacity additions, or fail to rapidly exploit the potential of unconventional gas outside the United States, or see oil under $40/barrel, there’s one more variant of this scenario that gets us back to LNG at its long-run marginal cost in North America. That is the situation in which the recent period of historically high petroleum prices leads China and others with significant oil and diesel-fired generation to replace it with something else, be it natural gas or coal or a lower carbon alternative. In this case, should the electricity sector remain the marginal consumer of natural gas in China, the price of natural gas would need to remain in equilibrium with the cost of coal generation, perhaps including a global CO 2 price at some point in the not too distant future. Something quite similar happened in the United States and Western Europe after the oil embargoes of the 1970s, when petroleum’s share of electricity generation fell from 19 percent to 12 percent over 5 years. And as occurred in the United States, this would cut the direct link of substitution between natural gas and crude oil. This variant also is consistent with less-expensive LNG prices. As an illustration, if we assume a $30/ton price for CO 2, and coal prices of around $1.50/MMBtu, the marginal price of landed LNG imports into China would need to be under ~$6 to compete for their share of the electricity generation market.
• Phase 3: Calpine’s Revenge: A few more years