Strategic interaction in ratcheted gas storage

Natural gas storage facilities form critical components in the energy networks of most industrialized nations. Storage facilities are typically very large underground salt caverns or depleted gas reservoirs that have undergone an expensive conversion process. Storage is extremely important because of the strong seasonality in natural gas prices due to demand patterns. We study the effects of competition when firms share space and injection/withdrawal resources and behave in a rational, self-interested manner to optimize utilization (typically using software systems to assist in decision support). Strategic interaction occurs between firms because injectability and deliverability depend on the total inventory stored. We analyze the interaction that occurs in a pre-commitment game where firms commit to inject until a certain time and subsequently withdraw the commodity until it is exhausted. We compute equilibrium and welfare maximizing outcomes and calculate losses in efficiency. We also study the effects of incorporating a ldquouse-it-or-lose-itrdquo policy on overall welfare. Our results indicate that significant inefficiencies can occur in both settings and, therefore, have significant implications for the regulatory systems for storage facilities, price stability in the gas markets and the operational policies for storage companies.