Gas storage valuation under limited market liquidity

Various approaches to natural gas storage valuation applying real options theory have been developed in recent years. Postulating storage operators as price takers these methodologies ignore the important fact that most evolving gas spot markets, like the German spot market, lack of liquidity. Thus, considering storage operators as price takers does not account for interdependencies of storage operations and market prices. This paper offers a new approach to storage valuation under respect of the effect of management decisions on market prices. The within this paper proposed methodology determines the optimal production schedule and value by applying a simple finite difference scheme on the stochastic differential equation describing the storage value. The paper is organized as follows: The first section introduces the valuation problem and gives an overview above recent research on gas storage valuation. Furthermore common definitions of market liquidity are introduced. Section 2 analyses possible liquidity measures to quantify the possible impact of storage operations to market prices. Subsequent the valuation methodology is described. The fifth section applies the methodology to an exemplary German storage facility. Finally section 6 concludes.