# Quantifying natural gas storage optionality: a two-factor tree model

## Cliff Parsons

#### Abstract

ABSTRACT

We quantify the optionality in US natural gas storage leases under a model of optimal storage management. The model utilizes a two-factor tree in which both factors mean-revert; it calibrates to current market conditions, accounts for volume constraints and determines whether injection or withdrawal is optimal at the given inventory and market conditions. On Henry Hub price data spanning 1999 to 2006, simulated trading using our model obtained average values of US$1.244 per million British thermal units (MMBtu) over intrinsic value for fast-cycle storage leases and US$0.397 per MMBtu over intrinsic for slow-cycle leases. The model's forecasts of simulated trading values were quite close to corresponding simulated trading values on average: within US$0.10 for fast-cycle leases and within US$0.01 for slow-cycle leases.