Capitalize on the Trading

ORFE Senior Prospectus The Effects of Storage on the Trading of Natural Gas Jennifer Lauren Schoppe Advisor: Professor Warren Powell 9/28/2009 This outline is submitted in order to fulfill the Department of Operations Research and Financial Engineering’s requirement of a Senior Prospectus, due September 28, 2009. Chapter 1 – Introduction The seasonality of natural gas demand leads to the general practice of storing natural gas at low demand and low price, later selling during times of higher demand and higher price. However, as storage starts to fill up and prices continue to drop, the maxim store low, sell high may need to undergo further specification. Complications of this problem include storage capacity limitations; even more specifically, different storage facilities (salt cavern, aquifer, mine, etc.) and the rates of withdrawal and injection both play a role in response time when trying to capitalize on a certain price and trade. Also, the fluctuations in spot price and futures prices as well as the charges and fuel losses associated with injections and withdrawals must be taken into consideration. Taking into account these various factors, an optimal policy in regard to the question of storing or selling natural gas is hoped to be achieved. Overview of Storage Types A summary of major storage technologies and their physical characteristics. Overview of Natural Gas Prices A summary of how gas is priced and traded. Overview of the content in this paper that allows me to earn my PACM Certificate Overview of Thesis In this research, we hope to design policies for using natural gas storage devices to better capitalize on the trading of natural gas contracts. Chapter 2 – Literature Review Problems regarding the storage of natural gas have been worked on for many years. This section will give an overview of the research and solutions found to date including methods involving approximate dynamic programming which the commercial world has yet to accept as a viable means to a solution. Chapter 3 - Storage Types This chapter will provide greater detail about natural gas storage technologies and their physical and economic characteristics. Pictures will be included of each storage type. Review of current storage technologies Depleted Oil and Gas Fields- the most common form of storage due to their wide availability. One benefit of converting a field from production to storage is that it takes advantage of existing wells, gathering systems, and pipeline connections. Mines- abandoned mines have been used in the past, however only one such has been used in the United States Aquifers- while the geology is similar to that of a depleted field, yet will require more base gas. Salt Caverns- although the most expensive form of storage to construct, salt caverns provide high deliverability rates for relatively low base gas levels. Caverns are able to perform several injections and withdrawals per year. Hard-rock Caverns- this method is currently undergoing testing. None are commercially operational as natural gas storage sites. Economics of storage What do they cost to purchase? What do they cost to use? What is the lifetime? How are they used? How are these technologies currently being used? Storage Measures The volumetric measures used to quantify the fundamental characteristics of an underground storage facility and the gas contained within it. Total gas storage capacity- the maximum volume of gas that can be stored in an underground storage facility in accordance with its design. Total gas in storage- the volume of storage in the facility at a particular time. Base gas- is the volume of gas intended as permanent inventory in a storage reservoir to maintain adequate pressure and deliverability rates throughout the withdrawal season. Working gas capacity - total gas storage capacity minus base gas. Working gas - the volume of gas above the level of base gas and that which is available to the marketplace. Deliverability rate - is most often expressed as a measure of the amount of gas that can be withdrawn from a storage facility on a daily basis. Also referred to as the deliverability rate, withdrawal rate, or withdrawal capacity, deliverability is usually expressed in terms of millions of cubic feet per day. The deliverability of a given storage facility is variable. In general, a facility's deliverability rate varies directly with the total amount of gas in the reservoir: it is at its highest when the reservoir is most full and declines as working gas is withdrawn. Injection rate - the complement of the deliverability rate. The amount of gas that can be injected into a storage facility on a daily basis. The injection capacity of a storage facility is also variable, and is dependent on factors comparable to those that determine deliverability. By contrast, the injection rate varies inversely with the total amount of gas in storage: it is at its lowest when the reservoir is most full and increases as working gas is withdrawn. How do these measures affect the cost and use of the storage facilities? Chapter 4 Natural Gas Economics This section will look at the supply, demand, and trading of Natural Gas and how it effects prices and storage. Demand for Natural Gas Seasonality In this section the traditionally cyclical demand for natural gas will be explored. Demand for natural gas changes from season to season where demand was highest during the coldest months and lowest during the warmest months. The driver for this cycle of natural gas demand is the need for residential and commercial heating. This has resulted in demand for natural gas reaching its peak in January and February and falling during the months of July and August. How will the shift of using natural gas for electricity generation effect the cyclical demand? A graph illustrating the seasonal demand will be inserted here. Uncertainties effecting Demand How does the unpredictability of weather effect demand and prices? How does the state of the US Economy effect demand? Natural Gas Commodity Exchange and use of Financial Instruments This segment will devote itself to examining how natural gas is traded using an exchange of futures for swaps (EFS), an exchange of futures for physicals (EFP) transactions, or other derivatives. Look at Henry Hub’s role in pricing natural gas. Graphs of the natural gas futures and spot prices will be shown here. Price and Storage Relationship How does the storage capacity for working natural gas affect price? How does location of storage facility affect price of gas? How does pipelines and transportation affect prices? Chapter 5 - A Storage Model Now we have to develop the model for using storage to capitalize on trades for natural gas. We shall then apply it to data and evaluate. The mathematical model Notation, dynamics, objective function, etc. Applied Mathematics In this section I hope to contain work that will fulfill the requirements for the PACM Certificate. Model Evaluation Look at additional policy studies to determine how the model is affected by changes in the deliverability rates, fluctuations in spot prices, shifts towards greater use in electricity generation, location of gas and storage facility, and changes in weather patterns due to climate change. Chapter 6 – Results and Conclusion This chapter will summarize my results, draw conclusions from the research and the model, and generally draw the thesis to a close. References As I proceed with my research, sources cited within my thesis will be listed here. Sources used for developing this outline NaturalGas.org - http://www.naturalgas.org/index.asp Energy Information Administration http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html Federal Energy Regulatory Commission - http://www.ferc.gov/market-oversight/mkt-gas/overview.asp New York Mercantile Exchange.com: Natural Gas- http://www.nymex.com/ng_fut_efs.aspx