1. THE REAL COSTS OF US STRATEGIC PETROLEUM RESERVES MARKET VALUATIONby
Carol A Dahl, Colorado School of Mines, USA
and
Jennifer Considine, University of Dundee, Scotland
for
34th USAEE/IAEE North American Conference
Tulsa, OK, October 23-26, 2016

2. Mineral and Energy Economics Program and Colorado School of Mines
Dr. Carol A. Dahl
Professor Emeritus
Mineral and Energy Economics Program and
Senior Fellow
Colorado School of Mines
and

3. Dr. Jennifer I. Considine
Honorary Lecturer and Member of CEPMLP Global Academic Team
Center for Energy Petroleum and Mineral Law Policy
University of Dundee
King Abdullah Petroleum Studies and Research Center

4. What is SPR SPR still in the News Part of Research Agenda Measuring Cost Benefits of U.S. SPR Presented in Perth and Bergen actual/optimal Survey of SPR Modeling Edward Elgar: Handbook of Energy Politics Global co-author Yang Bai, School of Business, Nanjing Normal University, China

5. Methodology simple discounted cash flow (DCF)/net present value (NPV) sample model simple real options valuation have some initial results real options valuation/Monte Carlo simulations (ROV) sample model results don't take numbers seriously yet

6. U.S. SPR

8. SPR Still In the News
Opening Plenary Session modernization of SPR from crude to products international legal obligations PIGGY Bank questions about deliverability

9. Evaluating SPR: Costs
our interest

10. Benefits – Avoiding Net Loss in Consumer Surplus10
Benefits – Avoiding Net Loss in Consumer Surplus
SUS
(1-)SUS+ROW P
SUS+ROW P1 P0
DUS+ROW
DUS
QUd1
QUd0
QW1
QW0 Q

11. Externality Cost 11
e is GDP-price elasticity, P0 price with no disruption P2 post-drawdown of SPR GDP2 is observed gross economy GDP0 is potential value

12. Minimize Total Costs of SPR12
our interest
subject to a variety of constraints
can't exceed capacity
maximum fill and drawdown rates

13. Valuing Projects
That is traditional decision tree analysis enhanced to include state of the art technologies including multiple criteria, artificial intelligence, game theory etc. etc.
To cite only one source.
including multiple criteria, artificial intelligence, game theory

14. DCF 2016-2030 r = risk adjusted interest rate
DCF/NPV appropriate when no operating flexibility.
no delays/expansions/new products
abandonments/shut-ins
project is independent of future investments.
no “Strategic Options”

15. DCF: Project Assumptions
Futures curve for LOOP storage costs and WTI Project Discount Rate Operating Expenses Taxes Rates Market Center Margin Capital Costs

16. Sample DCF Results Yellow Changeable Assumptions

17. Sample DCF Results
Jennifer: I think this is probably the wrong version of results as there is no tax in 2016.
I will copy right ones in later.
7000

19. Call Options-Underlying Asset

20. Value of Call Option K=100 P=probability prices goes up
(1-P) = probability price down

21. Value Real Options (RCt) With Strike Price the Cost of Capital
DCFt up
RCt
DCFt down

22. The Black-Scholes Option Pricing Model
Geometric stochastic difference equation
where: C = the option price
S = the stock price
K= exercise price
τ = the time to expiration
r=risk free interest rate
σ=volatility of underlying asset
N(di) = the cumulative normal probability distribution

23. Simple Real Options Valuation As European Call Option

24. Real Options Value with Monte Carlo Simulations
Solved These include: Futures prices for crude oil Percent of crude oil required for strategic purposes Slippage errors Strategic drawdowns Project discount rate

25. Distribution of Variables for Monte Carlo Simulations

26. Normal Distributions For Oil Prices Change By Year Around Forward Curve

27. Probability Distribution For SPR Storage Facility

28. Value of SPR As Storage Facility Sample Output

29. Sum Up
Valuing SPR using the market Sample (DCF)/(NPV) Simple Call Options Real Options Valuation/Monte Carlo (ROV) Don't take any numbers seriously yet For copy of paper Leave me card – valuing SPR on back Any info on inputs much appreciated Valuing any inventory facility Excess oil capacity for NOC