Value of Flexibility in Gas Pipeline Investments

TitleValue of Flexibility in Gas Pipeline Investments
Publication TypeConference Paper
Year of Publication2015
AuthorsShaton, K
EditorKersten, W, Blecker, T, Ringle, CM
Title of ProceedingsInnovations and Strategies for Logistics and Supply Chains
Conference LocationHamburg
ISBN Number978-3-7375-7805-9
Other NumbersISSN (print) 2365-4430, ISSN (online) 2365-5070
KeywordsExcess Capacity, Gas pipeline Investments, Real Options, Value of Flexibility

Investments in upstream gas transport pipelines are characterized by significant
economy of scale: there is a low additional cost to establish capacity in excess of the
committed volumes. The excess capacity provides flexibility for cost-efficient expansions
of the transportation system if there are new discoveries in the future. Therefore,
investments in excess pipeline capacity may have a significant value for the gas
sector in general, which is disregarded by the private decision-makers. The flexibility
to expand the transportation network can be regarded as an option, which can be
exercised if there are new discoveries and market conditions are favorable. The objective
of this paper is to consider how Real Options thinking can be applied to estimate
the monetary value of the flexibility provided by excess capacity in gas
transport pipeline investments. The proposed method is based on the binomial lattices
and allows including both market and project-specific risks. An example
demonstrates how this value can be used by a public decision-maker in the evaluation
of infrastructure projects in the Norwegian gas transport sector.