Storage Development Wave Underway

An unprecedented wave of underground natural gas storage development is underway. 150 Billion Cubic Feet (BCF) of new "working gas" (i.e., usable inventory) storage capacity is currently under construction with another 600 BCF under development. This development activity represents a potential 20% increase in storage working gas capacity. Could this new storage capacity put a lid on rising natural gas prices and mitigate price volatility?

It is important to note that gas storage development involves bringing together the right combination of many factors – such as a suitable underground reservoir or salt dome, access to pipeline infrastructure, technical and environmental expertise, marketing skills, and numerous other aspects. In recent years more proposed working gas capacity has been cancelled than reached construction stage.

With over 160 BCF of recent cancellations, it is clear that this is a very competitive business. Out of the 600 BCF of working gas that remains under development, only a portion is likely to reach commercial stage given this challenging history. How large this portion winds up being will have an impact on gas prices and price volatility.

There are large differences in the types of underground gas storage. Traditional depleted reservoirs generally are used for seasonal storage as gas is normally injected and withdrawn relatively slowly. Salt cavern gas storage can be used to rapidly inject and withdraw inventory – in some cases up to 1 Bcf per day or more at a single cavern - making it attractive for traders that want to capture value from price volatility.

The majority of current development activity is focused on salt cavern storage. Depleted reservoir and small contribution from other types (mainly aquifers) comprise approximately 39% of all proposed capacity.

There is a geographical impact from this focus on salt cavern gas storage. Due to the geological location of underground salt domes along the Gulf Coast and the focus on salt cavern storage development, the states of Alabama, Louisiana, Mississippi, and Texas comprise two-thirds of all working gas capacity development.

The intense focus by storage developers on the Gulf Coast region and high deliverability, rapid cycling salt cavern gas storage is understandable. The extensive pipeline infrastructure, numerous interconnections, and trading hubs along the Gulf Coast make a supportive web to support salt cavern storage projects. Over the past several years rising gas price levels and strong price volatility have enabled these types of storage projects to act as cash machines. Not only have the negotiated rates for firm capacity at these projects risen, but the “hub services” revenues from advancing (loaning) or borrowing (parking) gas to support trading has exploded.

So, does this massive amount of Gulf Coast storage development resemble a bubble that will burst? Potentially of its own accord when the volatility these projects are trying to capture evaporates due to the massive increase in short-term supply deliverability.

Several trends suggest not.

First, the role of LNG in the U.S. supply mix. LNG will be a growing source of supply for the U.S. but will arrive (or not) subject to the complex global market. Increasingly, Henry Hub prices will reflect a much larger set of price dynamics beyond North American supply and demand.

Second, the role of natural gas in U.S. power generation. Increasingly, it appears that carbon regulation is a matter of timing. An R. W. Beck study on the impact of carbon regulation found that at a price on carbon of $30 to $50 per ton would lead to up to 50,000 MW of additional natural gas-fired capacity and boost demand by up to 2 TCF per year. However, the exact timing and level of this demand push from carbon regulation remains subject to a large degree of uncertainty. In addition, the increase of renewable power sources – mainly wind and solar - in large part in response to state level mandatory renewable portfolio standards, will create a further reliance on natural gas-fired capacity to firm up these intermittent power sources and ensure grid reliability and stability.

Greater complexity, uncertainty, and weather-sensitivity in U.S. natural gas supply and demand strongly suggest higher levels of price volatility in the future. A massive increase in high performance gas storage is both the response to this expectation and a necessary tool to adapt to it.