Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

CHAPTER 19 Natural Gas Storage Modelling

Álvaro Cartea, James Cheeseman and Sebastian Jaimungal

19.1 INTRODUCTION

When demand for a commodity is seasonal, whilst its production is relatively more stable and/or with a different seasonal pattern, being able to store it helps to reduce large price fluctuations as well as providing security of supply in unforeseen scenarios. Therefore, having access to storage is desirable but the costs to build the facility are very large and irreversible. The need of the market to smooth out price fluctuations, both between seasons as well as unexpected short-term deviations, and to ensure security of supply will determine the willingness to pay for such a facility.

The gas market is a good example of such a commodity and a key question is how much a gas storage facility is worth. The answer depends on many factors, some of which rely upon engineering specifications and others on financial characteristics of the commodity. For example, the rate of injection and withdrawal is a key determinant in the value of storage, but the higher these injection and withdrawal rates are, the more expensive it is to build and maintain. In contrast, the behaviour of gas prices over long- and short-term horizons is also decisive in the value of storage. Over long time scales, the value of storage is higher the more pronounced is the seasonality in gas prices and similarly, over short time scales, the higher the volatility of gas prices the more valuable is the ...