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EIA: Fewer Storage Providers Mandate End-of-Season Drawdowns

Fewer storage service providers are requiring customers to draw down their storage levels at the end of the winter heating season, the Energy Information Administration (EIA) said in a new report released last Monday.

"Possibly to enhance their storage service by offering more flexibility to their customers, some operators appear to have eliminated the traditional end-of-season storage limits," the Department of Energy (DOE) agency said.

But even more so, customers' actions have made moot the need for the drawdown restrictions. "It appears that [customers] voluntarily reduce their storage volumes below specified limits. This behavior reflects the economics of storage. Given the significant carrying charges to cover the commodity costs, along with storage fees, owners of natural gas in storage...work to avoid carrying amounts of natural gas in storage between heating seasons unnecessarily," the EIA observed.

As a result, "it seems unlikely that the contractual limits on end-of-season storage levels in the United States have much impact on overall natural gas markets and national prices, given that the aggregate [voluntary] withdrawals surpass the [contract] requirements," the EIA said.

Storage providers' contracts traditionally have mandated that customers reduce their natural gas in storage to a specific percentage of their contract volumes by the end of the withdrawal season (March 31) to prepare for the injection season and to protect the recovery of natural gas held in storage.

The EIA analyzed the contractual drawdown practices of 112 storage operators in the U.S. with 4,129 Bcf of working gas capacity. It found that 27 or about one-quarter of the storage service companies, representing more than half of U.S. working gas capacity, have limits on the amount of natural gas firm storage customers may hold in storage at the end of a withdrawal season or contract period. These companies operate 2,162 Bcf of working gas capacity.

The storage companies that impose limits tend to have larger facilities as measured by working gas capacity, according to the EIA. The working gas capacity for the companies with end-of-season limits average 80 Bcf and range from 2 Bcf to 413 Bcf, it said.

Thirty-four storage companies representing 1,525 Bcf do not have restrictions on the volume of natural gas that customers may retain in storage at the end of a withdrawal season, the EIA noted. These companies tended to be smaller in terms of working gas capacity than those companies that impose an end-of-season limit. The working gas capacity for storage companies without end-of-season limits averaged 45 Bcf and ranged from 0.6 Bcf to 268 Bcf, the agency said.

The EIA said it could not find sufficient information to determine whether any contract restrictions existed for 51 companies that have 442 Bcf of total gas storage capacity.

At the March 31 close of the 2007-2008 heating season, the EIA estimates that the maximum allowable natural gas in storage was 2,001 Bcf. That includes 395 Bcf from companies that "clearly impose" drawdown limits; 1,525 Bcf from storage providers that do not impose limits; and 81 Bcf from storage providers for which insufficient information existed.

The EIA said some storage developers will penalize customers who fail to reduce their end-of-season levels of gas in storage. In most cases, a storage company will take possession of the volume of a customer's natural gas that exceeds a specified limit either by purchasing it at a discount or by outright confiscation. It found that 10 of the 27 companies with end-of-season limits confiscate a customer's natural gas that exceeds the allowed limit without any compensation in return.

Storage service providers require customers to draw down the amount of natural gas in storage at the end of the withdrawal season primarily for operational reasons, such as increasing operating pressure. A drawdown also is required to avoid migration of natural gas into unrecoverable areas of a storage reservoir, according to the EIA.

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