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Investment strategy for underground gas storage facilities based on real option model considering gas market reform in China

Siyuan Chen, Qi Zhang, Ge Wang, Lijing Zhu and Yan Li

Energy Economics, 2018, vol. 70, issue C, 132-142

Abstract: Natural gas is expected to play a much more important role in China's energy supply, however, the lack of underground gas storage facilities becomes a serious barrier for its market penetration. Therefore, gas market reform is expected to be incentive for developing gas storage facilities. In the present study, a real option model was proposed to analyse the optimal investment strategy (investment timing and value) for underground gas storage facilities with/without the consideration of gas market reform. Uncertainties in gas market, government incentives and technological improvements were considered. The obtained results showed that it was not optimal for immediate investment in underground gas storage in China, and that to implement gas market reform would greatly contribute to gas storage construction. With the consideration of gas market reform, the investment of underground gas storage would be executed at 2026 with an investment value of 0.33RMB/m3 if there were no government incentive, while to invest in 2030 would be the best decision without the consideration of gas market reform, and the investment value is only 0.05 RMB/m3. Through a sensitivity analysis, the effects of changes in parameters related to gas market, government incentives and technological improvements on the investment strategy were investigated. The conclusions can provide useful information for gas storage enterprise decision-makers on whether and when to invest underground gas storage facilities in China considering uncertainties.

Keywords: Underground gas storage; Real option; Investment strategy; Gas market reform (search for similar items in EconPapers)
JEL-codes: G11 Q35 Q48 Q41 C15 O33 (search for similar items in EconPapers)
Date: 2018
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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