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Natural Gas — Using MarketBuilder to Inform Key Decisions

What is the impact of the delinking of natural gas to crude oil prices on your business?

NaturalGas

Revolutionary North American shale gas development has proven to be a disruptive innovation. It's altering the gas industry landscape as the United States moves from net importer to net exporter status and Asia, South America and other regions ramp up their demand. Today's headlines paint a vivid picture, but what comes next? Who will benefit in the mid to long term? Recent dips in gas prices are putting the squeeze on demand for other fuels—but also on gas producers' profits. Meanwhile, winter storms can still drive spikes in gas prices and remind us that increased reliance on natural gas also brings price volatility.


How MarketBuilder helps you make decisions on gas

Asset ProfitabilityDiagram 1: Asset Profitability
For Illustrative Purposes

Companies calculate the profitability of assets they build, buy, or sell as depicted in Diagram 1. They estimate the capital cost, operating cost, and energy efficiency of the asset (bottom of Diagram 1); they specify the time and risk preference, book and tax parameters, and taxes and other "takes" (top of Diagram 1); and they project the price of the output over time (top left of Diagram 1) and the price of the input over time (bottom left of Diagram 1). Then they use the results in a profit calculation (e.g., Discounted Cash Flow or DCF).

What do they find? They often find that the most important determinant of profitability is the difference between the expected price of the output and the expected price of the input. Yet this is often the least accurate component of the analysis.

MarketBuilder models the supply curves for the input and output commodities in your markets, treating each component as a competitive independent agent and simulating the way the real market works. As a result, it helps you to calculate the estimated price of both the input and the output by providing a justifiable price difference for each of your assets.

Margin CaptureDiagram 2: Margin Capture
For Illustrative Purposes

MarketBuilder lets you calculate the projected profitability, forward through time, of new or existing assets, depicted in the shaded area of Diagram 2, using time-tested technology and data. Diagram 2 illustrates that margins are not level, normalized, or annuitized, and determines them by simulating market behavior forward through time. Having a tool you can use to project prices and the profitability of each of your assets through time is central to your strategic and asset decisions.

This analysis of output-input price difference is suitable for the following types of assets:

  • Pipelines (and pipeline entitlements) — MarketBuilder has been used to analyze many pipelines throughout the world
  • Upstream assets — locational wellhead prices in regions where you might conduct E&P
  • LNG regasification terminals — basis differential from LNG FOB to vaporized gas
  • LNG shipping
  • LNG liquefaction—wellhead price to liquids price FOB
  • Downstream consumption devices ranging from power plants to boilers to fertilizer plants

With MarketBuilder's flexibility, methodological sophistication, ease of use, and demonstrated accuracy, you can easily adjust parameters to model potential market and policy phenomena such as shale gas cost, CO2 policy, or renewables and incorporate them into your analysis.

Returning to the question: What is the impact on your business of the delinking of natural gas to crude oil prices? MarketBuilder reveals the impact because it helps you to analyze the projected price of oil and gas at the location of each of your assets.

MarketBuilder has detailed supply chains for gas and oil from source to distribution and treats each component as an independent, profit-seeking, competitive agent, as in real-world markets. The thoroughness of this approach, and MarketBuilder's many other easy-to-use capabilities, helps you analyze the relative and absolute value of oil and gas-related investments in many different scenarios.

MarketBuilder's reporting capabilities help you to visualize how these prices apply to your business by asset, by business, in aggregate, or in other ways, for each scenario you analyze. MarketBuilder helps you take a more informed approach to decisions than other solutions that use non-analytical perspectives on gas prices versus oil prices.