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How can a natural gas storage facility be value as a real option?

How can a natural gas storage facility be value as a real option?

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Real option analysis can be applied to valuing natural gas storage facilities because for certain types of storage, such as salt dome caverns, there is substantial flexibility in the operations. Using salt caverns, the natural gas can be more easily withdrawn and sold when prices are high or injected into the storage when prices are low. The facilities can be operated to trade around expected future prices and can maximize real option opportunities. Such options can be very valuable based on the seasonality and volatility in natural gas prices.Therefore, owners or leasers of storage can buy in cheap seasons and sell in expensive seasons and concurrently trade on derivative contracts on natural gas.

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