Natural gas storage -- which during the energy marketer heyday was frequently described as an asset to be optimized -- has come full circle, back to its pre-New York Mercantile Exchange roots, a storage development executive told NGI.
Much of the thrill of locational arbitrage is gone, thanks to the flattening of basis spreads, and gas-fired power generation is in the ascent, increasing the need for storage to serve operational as opposed to financial needs, said Andy Lang, CEO of Merchant Energy Holdings, LLC. Merchant Energy was just formed from the combination of Denver-based Merchant Energy Partners LLC (MEP) and Houston-based Icon NGS LLC.
"There's a lot of sense that we don't need any storage," Lang said. "I think perhaps people are heavily influenced by the fact that we've got so much gas supply right now. But I think that's going to change..."
MEP has been developing East Cheyenne Gas Storage in northeast Colorado, which is slated to be the first merchant storage facility to serve pipelines connected to the Cheyenne Hub; these include Trailblazer and Rockies Express. Icon has been developing the Tallulah Gas Storage project, a salt cavern facility in northeast Louisiana that would serve customers passing through the Delhi Hub, which is 15 miles west of the project site.
"Now we're at a phase where we're ready to move forward with construction," Lang said of the projects. "We'll still prospect, but not with the amount of intensity that we did previously, largely because we have two good projects on our plate."
The Tallulah and Cheyenne projects were developed first with location in mind, then geology, Lang said. Both projects rely on nearby hub activity for their value.
"Delhi has become the confluence of all the new bullet pipes that are bringing gas out of the shale plays," Lang said. These include the Haynesville and Barnett Shales. While many refer to the Louisiana juncture of this gas as the Perryville Hub, Lang said that name is "more centric to CenterPoint" Energy.
"We refer to the Delhi Hub, he said. "Delhi is probably more representative of the physical junction and location where liquidity is going to be created for the Barnett and Haynesville shales. It really goes beyond that. I think you would expect to see impacts from the Fayetteville Shale and of course the other shales in Oklahoma and the area. But those pipes come together at Delhi and that's really where the liquidity is going to develop. You really can't have a good liquid trading center if you don't have storage."
Lang conceded that interest in these dry gas shale plays has been declining of late as producers pursue much stronger netbacks available in liquids-rich plays such as the Eagle Ford and Marcellus shales. However, Deli will still be getting gas that has been dedicated to pipes entering the hub. Further, when economics improve, producers in the dry gas plays will be ramping up activity, he said.
Supplies getting pushed back down to the Gulf Coast because of growing Marcellus Shale production also will be served well by Delhi and the storage available there, Lang said. "The attraction of Delhi is that there's a lot of pipes that run north and south as well as east and west," he said.
The Cheyenne storage project is slated to serve the growing gas-fired power generation in the Rockies Front Range and eastern Colorado, Lang said. Again, its a project targeting operational needs rather than arbitrage opportunities.
Seasonal spreads have historically been where the money is in the storage game, but robust supply growth and flattened basis have made those opportunities less attractive, Lang said. "We have focused on where there's a need for the storage for operational purposes, for trading hub liquidity or for pipelines that need storage to enhance their ability to optimize throughput...I don't think the financial drivers, particularly the ones that provided a great deal of support to storage pre-2008, I don't think those are going to recover real soon."
But there is the promise of more gas-fired power and its associated swings in gas demand. "Coupled with that is the fairly sizeable development of alternative energy, predominantly wind energy that's got its own set of variables," Lang said. "So gas storage is going to play a much bigger role in terms of the infrastructure needed to make gas a viable, attractive fuel for power generation." He cited the Cheyenne project as an example.
It wasn't long ago that the prospect of a substantial increase in U.S. imports of liquefied natural gas (LNG) spurred a wave of storage development in the Gulf Coast region. The thinking was that gas supplied from LNG cargoes has a lumpy nature, making storage a necessity to even out the supply stream.
"I think there are some projects that were along the coast that were sort of earmarked for the LNG trade that are going to find themselves with a lot less throughput than they otherwise would have," Lang said.
However, what was planned to work in one direction might work going the other way if the Gulf Coast becomes the site of liquefaction of domestic gas for export. Lang said he's skeptical that buyers will be willing to step up to long-term contracts in support of Gulf Coast liquefaction. But he'd "love to see it happen" nonetheless.
"Clearly, when an LNG facility is in a state of liquefying gas supply, having backup storage, I think, would be critical to its ability to optimize and maximize its liquefaction exercise by having supply in addition to flowing pipeline supply," he said.
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