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FERC Staff: Value of Gas Storage Has Never Been Higher

The value of gas storage capacity is at a new high this injection season because of the threat of hurricanes, growing gas-fired generation, LNG import growth and very little new storage capacity added over the last decade or more, FERC staff said in a presentation last Thursday at the Commission's regular meeting. The presentation provided support for the Commission's final rule issued Thursday relaxing market power tests for new storage capacity (see related story).

Steve Harvey, director of the Division of Energy Market Oversight, told the Federal Energy Regulatory Commission that the "customer value" of storage has accelerated significantly over the last few years. "This last Friday [June 9], the futures market-based value of storage looked like a little more than $3.56/MMBtu -- almost three times what it was last year at this time," he said. "This value has been even higher in the recent past -- it was higher than $4/MMBtu a month ago."

Harvey said the value of storage (June-November futures) was 27 cents in 2003, 52 cents in 2004 and $1.20 in 2005. The realized value in those years was a negative 73 cents in 2003, 37 cents in 2004 and $2.24 in 2005. "During the five years before the beginning of this chart, no futures-based value was higher than 60 cents/MMBtu," he said.

"In addition, we can calculate the summer-winter price differences for the next few years in the futures market. As of last Friday, futures-based storage values for the next four years range from $1.85 to $1.95/MMBtu. Though lower than this year, those futures values are, nonetheless, a strong signal of current expectations of strong storage value in the future."

What makes this year's storage value even more significant is that it is so high despite the record level of working gas already in storage, he noted. Working gas levels as of June 9 were 38% above the five-year average and 23% above levels at the same time last year. This seems to indicate that the market is in need of more storage capacity.

"There could be many reasons for the strength of this futures market-based signal -- fears about gas use in electric generation this summer, fears of hurricanes, fears of international pressures on oil prices," Harvey noted. "Still, the strength of the November through March seasonal price spread in the face of huge existing storage inventories clearly emphasizes the fact that gas markets value storage right now at unprecedented levels."

Staff member Jeff Wright said one reason the market value of storage has never been higher than it is today is that total storage capacity in the United States has grown by only 1.4% since 1989. Since 2000, FERC has approved about 263 Bcf of storage capacity and 12.4 Bcf/d of deliverability. "These may seem like large numbers but when one looks at the nation's storage capacity and working gas capacity, it is apparent that these approvals do not have an overwhelming impact on the overall totals," said Wright. "It is also noteworthy that the Commission certification of storage capacity and deliverability has trended downward since 2002."

Furthermore, the value of storage is only going to increase with the large amount of LNG expected to arrive in the U.S. over the next decade, they said. With the three new LNG regasification projects and two LNG expansion projects on Thursday's FERC agenda, along with the seven proposed LNG terminals already approved in the Gulf Coast region there could be a total of 18.9 Bcf/d of incremental regasified LNG looking for a home in the U.S. Gulf Coast in the coming years. "The perfect place for this gas that is not immediately sent to meet customer demand would be underground storage," said Harvey.

The current international LNG market in the Atlantic Basin also is structured to support more storage capacity in the U.S. because Europe doesn't have adequate storage capacity to hold regasified LNG in the summer and also doesn't have strong summer gas demand. As a result, the U.S. market could benefit from providing a home for lower priced summer LNG supply by building more storage capacity.

"Spain is now oversupplied to such an extent that it is causing delays in shipping (as LNG tankers cannot be emptied fast enough)," said Wright. "This is to our gain. Any excess cargoes that can come to the U.S. are doing so. However, this will be a short-term -- that is, summertime -- phenomenon. Eventually cold weather will come to Europe and gas demand there will increase and I will highlight two countries in particular -- Spain and the United Kingdom -- that will affect LNG imports to the U.S."

He said Spain's storage capacity is only about 8% of its annual consumption compared to the U.S. where working gas capacity makes about 17% of total annual consumption. Spain has about 3.4 Bcf/d of LNG regasification capacity with another 1.8 Bcf/d on the way. The U.K. 's working gas storage capacity makes up only about 3% of its annual consumption. The U.K. has about 0.4 Bcf/d of LNG regas capacity currently and 3.6 Bcf/d planned.

"What this means is during the winter season," said Wright, "the U.S. will face considerable competition from Spain and the U.K. for LNG -- a significant component of these two countries' gas supply." As a result, the U.S. will benefit by grabbing as much LNG as possible from the international market during the summer and storing it, Wright and Harvey indicated.

Despite all these factors pointing to the need for new storage capacity in the United States, there currently is only one storage project pending at the Commission, FERC staff said. Bobcat Gas Storage in Louisiana would add 12 Bcf of storage capacity and only 1.2 Bcf/d of deliverability to the Gulf Coast region.

That doesn't mean that more storage projects won't be coming soon. With all the current signals pointing to the need, there certainly could be a turn toward more storage development.

According to FERC staff there are potential storage projects totaling 148 Bcf of capacity and 4.7 Bcf/d of deliverability. "Again not exciting numbers," said Wright. "One point of interest is the location of the potential storage. A good portion of the potential storage capacity is located in the Southeast, particularly in the Gulf Coast area. This is no coincidence as the vast majority of approved and proposed [LNG] projects are located along the Gulf Coast as well."

One of the things weighing against more storage development has been the price of gas. Storage fields require a substantial amount of base gas in the ground in order for there to be enough pressure to operate. That base gas is pretty expensive these days. Interest rates also are rising making it more challenging for a developer to finance a storage project investment. "Also, storage facilities have long lives, and investment decisions have to reflect longer-term assessments value than we can see in the current market prices," said Harvey. "Recent high storage price differentials do not guarantee high storage value in the future, but they are consistent with a positive market incentive."

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