Investment Strategy for Underground Gas Storage Facilities Based on Real Option Model Considering Gas Market Reform in China

Transcription

1 Investment Strategy for Underground Gas Storage Facilities Based on Real Option Model Considering Gas Market Reform in China Siyuan Chen, Qi Zhang*, Xi Yang, Ge Wang, Yan Li

2 CONTENT Introduction Literature review Methodology Numerical results Conclusion 2

3 CONTENT Introduction Literature review Methodology Numerical results Conclusion 3

4 Introduction Natural gas is expected to grow faster than oil or coal, with consumption increasing by 1.6% per year between 2015 and 2035, reaching Mtoe and Mtoe respectively in 2030 and Natural gas will surpass coal becoming the world's second largest fuel, accounting for 25% of primary energy consumption. Natural gas consumption during Primary energy structure in 2035 Source: BP, Energy Outlook

5 Introduction Natural gas has been a seasonal fuel. Natural gas storage plays a vital role in maintaining the reliability of supply needed to meet the demands of consumers. Monthly natural gas consumption in US during Source: EIA 5

6 Introduction Underground gas storage (UGS) has advantages in storage capacity, stability, and security. UGS Working volume distribution (bcm/a) The world s UGS is about 630, with total working volume of bcm, accounting for 10.3% of the global natural gas consumption. China has built 18 UGS, with total working volume of 5.5 bcm, only accounting for 2.85% of total gas consumption. Source: IGU. 6

7 Introduction China has published a series of policies to promote natural gas market reform. Storage service price will be separated from gas price, and determined by the consumers and suppliers. In the document Opinions on Accelerating the Use of Natural Gas, it is clearly put forward that market pricing is the primary goal of gas reform. Government pricing No separate gas storage price Market pricing Independent storage price 7

8 CONTENT Introduction Literature review Methodology Numerical results Conclusion 8

9 Literature review 9

10 CONTENT Introduction Literature review Methodology Numerical results Conclusion 10

11 Model framework Methodology 11

12 Parameter estimation Methodology Gas demand 01 Gas supply 02 GBM Initial investment cost O&M cost 12

13 Gas market reform P P r jk, D S / D Pe j, k j, k j, k The time lag effect Methodology before implementing gas market reform after implementing gas market reform Pr jk, ( j t1)*12 k, j<t ( R 1)*12 1, j t R R 13

14 Methodology Real option model ti L - r( i- ti ) t [ - ] i j ti j t NPV E e IC i 12 [min(max( S j, k Dj, k,0), C Z j, k 1 ) min(max( D j, k S j, k,0), Z j, k 1)] rk j e k 1 ( Pf VC j, k ) Z j, k Pj, k Z Z min(max( S D,0), C- Z ) min(max( D S,0), Z ), k=2,...,12 Zt i j, k j, k 1 j, k j, k j, k 1 j, k j, k t, k 1,0 0 Where L: lifetime of UGS; D&S : gas demand and supply; r: discounted rate; P f : fixed storage fee; Z j,k : storage amount P j,k : variable storage fee; IC : initial investment cost; VC: variable cost. C: Capacity of UGS 14

15 Methodology Option construction: the option to defer F max( F, V I ) 1 t t

16 CONTENT Introduction Literature review Methodology Numerical results Conclusion 16

17 Robust test Numerical results Simulation results converge to a certain value. 17

18 Numerical results Simulation Simulated gas demand Simulated gas production Based on historical data of gas demand and supply, published by the National Bureau of Statistics in China. 18

19 Simulation Numerical results D j, k S j, k / D j, k P, P e with gas market reform jk Simulated gas storage price 19

20 Numerical results Simulation Simulated investment cost Simulated O&M cost 20

21 Investment strategy Numerical results Scenarios Methods Investment Value (RMB/Cubic meter) Delay Option Value (RMB/Cubic meter) Reform Value (RMB/Cub ic meter) Optimal Decision Market reform No reform DCF RO DCF RO Do not Invest Invest in 2021 Do not invest Do not invest 21

22 Sensitive analysis Numerical results Subsidy has a more positive effect on investment timing when without gas market reform. Subsidy is benefit for investment value in both two scenarios. 22

23 Sensitive analysis Numerical results The optimal timing is 2030 only when the drift rate of investment technology is raised to 6% when without gas market reform. Investment value changes a little as the drift rate increasing from 0 to 5% when with gas market reform, while change a lot as the drift rate increasing form 5% to 10%. 23

24 Sensitive analysis Numerical results Sensitivity to gas market has a more positive effect on investment value, while limited effect on investment timing. Lagged time is more helpful to advancing investment timing, while has a little effect on investment value. 24

25 CONTENT Introduction Literature review Methodology Numerical results Conclusion 25

26 Numerical results Current investment environment in China is not attractive enough for immediate investment. The optimal investment timing could be shifted to an earlier year of 2021 when gas market reform is executed, compared to the situation without gas market reform. Subsidy has a more positive effect on investment timing when without gas market reform. Sensitivity to gas market has a more positive effect on investment value, while limited effect on investment timing. Lagged time is more helpful to advancing investment timing, while has a little effect on investment value. 26

27 Thanks