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Natural Gas – How MarketBuilder helps inform your decisions

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

When making strategic decisions, there are many unknowns that must be analyzed and understood, such as the answer to the question above, in order to make informed choices for your business. We’ve categorized important questions addressing many issues to be considered in making strategic decisions, questions that MarketBuilder (Deloitte MarketPoint’s premier software solution for fundamental market analysis and price forecasting for commodities) can help you answer. Each category is listed below, with two questions included as examples. Following the question section below is a brief introduction of how MarketBuilder can help you answer these questions in making strategic decisions.

  1. Prices
    • What is the price of natural gas at locations worldwide expected to be for the next 30 years?
    • What is and what is expected to be the connection between the price of crude oil and the price of natural gas?
  2. Major companies around the world—what are likely actions they might take based on their business interest and how will those actions affect price?
    • What is the profit maximizing level of gas output for the large suppliers—Qatar, Iran, Saudi Arabia, and Russia?
    • What is the revenue maximizing level of output for these countries (individually and as an aggregate)?
  3. Primary Resources, LNG, and Final Demand
    • What is the long run marginal cost of shale in known basins of the world? When and to what degree is that expected to come into the money, stimulating production?
    • What is the known supply of conventional gas around the world and what is the cost and “geology” to extract the gas? Are these costs competitive to justify the expense?
  4. What might CO2 policy do to the gas business?
    • Is it a worthwhile exercise to retrofit gas equipment to reduce CO2 output, or will sufficient CO2 allowances be available in the market?
    • Would CO2 regulation be financially helpful or hurtful to the gas business? Upstream? Midstream? Downstream? Oilfield Services?
  5. Projects, Investments, and Assets
    • For each pipeline or upstream asset you own, how much is it worth? What is the minimum price you would expect for it?
    • For each pipeline or upstream asset you might consider owning, what is the maximum price you would be willing to pay for it?
  6. LNG
    • Will LNG be attracted to Europe and Japan, chasing oil prices in those markets, or will gas prices drop relative to oil prices in those regions?
    • Is it realistic to expect that LNG will be exported from North America in the future? Will there be a customer outside North America that can and will pay the premium price necessary to attract the exports?
  7. Storage
    • What is the expected dollar amount that will be required to lease any particular storage field?
    • In considering prospective investments, what is the net present value of a particular salt or reservoir storage project?
  8. Data
    • Do you have supply data for the known basins in the world?
    • Do you have supply data for the known shale producing regions, existing or prospective, around the world?

How MarketBuilder helps you make gas decisions

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 Diagram 1); they specify the time and risk preference, book and tax parameters, and taxes and other “takes” (top of Diag. 1); and they project the price of the output over time (top left – Diag. 1) and the price of the input over time (bottom left – Diag. 1) and then use the results in a profit calculation (e.g., Discounted Cash Flow or DCF).

Profit Calculator

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. That difference is a key driver of asset profitability, and yet, often, this is 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 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 providing a justifiable price difference for each of your assets.

MarketBuilder enables you to calculate the forecasted 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 they are determined 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.

Margin Capture

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 are able to easily adjust parameters to model potential market and policy phenomena (e.g., shale gas cost, CO2 policy, renewables) and incorporate them into your analysis.

Returning to the question: What is the impact of the delinking of natural gas to crude oil prices on your business? The impact is revealed by MarketBuilder in that it helps you to analyze the forecasted 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. With the thoroughness of this approach and MarketBuilder’s many other easy-to-use capabilities, it 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, etc. for each scenario you analyze. MarketBuilder helps you take a more informed approach to decisions compared to using non-analytical perspectives on gas versus oil price.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.