AGA study sees shift in use of US natural gas storage facilities

By the OGJ Online Staff

HOUSTON, Aug. 14, 2001 – The American Gas Association reports underground storage is evolving from a peak-shaving tool for utilities to a commercial system that enables companies to manage gas prices and supplies all year.

In a report issued Tuesday, AGA said although interstate pipelines and gas utilities own and operate 96% of all US storage capacity, a new player – the natural gas marketer – has emerged to control 24% of underground storage capacity through contracts and gas supply asset management agreements.

Chris McGill, AGA managing director of policy analysis, said, “During the past 15 years, even though natural gas storage has become a more commercial enterprise, reliability of service [by utilities] has not been compromised and, in fact, has likely been enhanced by this transition. The old rules regarding the quantities of storage required to meet seasonal load variations are no longer valid.

“Until the mid-1980s, commercial value for underground storage was limited in part by the heavily regulated pricing structure for natural gas, making it unreasonable to inject gas into storage with the expectation of capturing seasonal value. As competition in the natural gas industry has increased, storage has evolved to be an important economic asset.”

The report said the complex interaction between storage, weather, demand patterns, and pricing helps explain the unusual storage fill and utilization pattern before and during last winter.

“Early in the season, many observers expressed concern that not enough natural gas was being injected into storage. Injection rates were lower than in previous years. In fact, storage users were acting rationally in response to the price signals in the market at the time and there was no shortage of natural gas for critical applications. Across the country, gas distributors were able to meet their obligations.”

The report, which International Gas Consulting Inc., Houston, prepared for AGA, said rapid growth in the use of gas for electric power generation may further change the way underground storage is used. “Storage can be the most secure, economical way to deliver natural gas at variable hourly rates as required by power plants. Natural gas storage can fill this emerging requirement in a variety of ways.”

The report also said that the increased number of natural gas market centers and hubs has increased liquidity in gas markets by giving producers, marketers, utilities, and end-users more confidence that they can buy or sell the amount of gas they need at any time at the market price – diminishing the need to hold storage capacity in some cases.

Separately, AGA said gas supplies would be adequate to meet demand during the winter heating season.

It noted that underground storage was 67% full at 2,203 bcf during the week ending July 27. That compared with 1,920 bcf, or 59% of capacity, in the same week a year ago.

AGA said wholesale prices have declined significantly this year. It noted the US Energy Information Administration reports prices averaged about $6/Mcf last winter, but will average $4.40 this year and $3.20 next year. EIA also said growth in gas supply would likely exceed demand this year, since 55% more rigs are drilling for gas than a year ago and demand for gas is increasing more slowly this year.

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