As the gas industry continues its infrastructure build-out to tap unconventional and Rockies supplies as well as accommodate growing imports of liquefied natural gas (LNG), two things will go hand in hand: pipelines and storage, according to at least one industry executive.
"Demand for storage is going to lead to demand for pipe, and demand for pipe is going to lead to demand for storage. These two infrastructure vehicles are going to be tied closely together. It's not going to make much sense to talk about them standing alone," Patrick Johnson, El Paso Pipeline Group vice president for strategy, recently told a Houston audience.
The gas industry is "wired for growth" for the next five years on the strength of gas-fired power generation, and depending upon what happens with coal-fired and nuclear generation that could be the next 10 to 15 years, Johnson told attendees at the Platts second annual Pipeline Development and Expansion conference. Economic growth is driving electricity demand, which is powering gas demand, he explained.
Couple this growing demand picture with shifting supply sources. Far less gas will be coming to the United States from Canada in the years ahead as Canadians burn more of their own gas. Add growing supplies from the Rockies and Midcontinent, and the "shift in supply and location of demand drives demand for new infrastructure, pipe and storage," Johnson said. "Demand is occurring in a lot of places where there isn't a lot of local supply and there isn't a lot of storage."
Shifting supply, particularly from LNG, and changing demand patterns will create a lot more volatility, which is a basic value driver for new infrastructure, Johnson said. "These trends blend together to influence the value of infrastructure. Pipelines and storage become complementary capacity. You don't have one without the other, and the demands that drive one drive the other."
Gas demand growth is projected to be about 2.5% per year for the next five years and about 2% for the next 10 years, Johnson said. The Northeast and Southeast are far ahead of the national average, he noted, with the biggest area of absolute growth being the Southeast. "After 10 years it's very close to the Texas area and passes the Midwest and Northeast," he said. The main driver of demand in the Southeast is electric generation.
This electric generation demand is part of what's reshaping the demand curve. While the curve is going up its shape is changing due to the "peakier" nature of power generation demand and the waning stabilizing influence of industrial demand, which is in decline. Couple this increased seasonal variability in demand with the highly seasonal outlook for LNG supply.
"There are lots of contracts for LNG to buy it on a long-term basis in the world. There are not very many in the United States," Johnson noted. Japanese, Korean and European markets generally hold the long-term contracts for LNG, and they have roughly the same kind of weather as the United States.
"It will only be in the summer that [LNG] will want to come to the United States and that's because...the United States is where the storage is," he said. At least in the summertime, the U.S. is poised to be the "worldwide warehouse for LNG.
"The ultimate storage play is to buy LNG in Algeria in the summer and sell it in New Jersey in the winter," Johnson said. It can be done, but only by players that have the necessary pipeline and storage capacity to serve the market.
Unfortunately for the U.S. market, the growth in gas demand is not occurring where gas storage exists. Johnson noted that there is generally no storage in New England, Manhattan, New Jersey, Florida, the Carolinas or Georgia. "That's where the big demand is occurring. We show growth in the Northeast. It's not in western New York or western Pennsylvania where the storage is. It's in eastern New York and eastern Pennsylvania where the storage is not."
Add to the list of high-demand, storage-poor areas Phoenix and Las Vegas, where Johnson said demand is growing 5-6%/year.
"Most of the [new] storage proposed is independent developers who will then have to connect pipes and then have to connect LDCs [local distribution companies]," Johnson said. "The linkage between storage and pipes will grow stronger going forward."
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