The diminished outlook for U.S. imports of liquefied natural gas (LNG) is one factor that will imperil some gas storage projects in the Southeast/Gulf Coast region, but there still is a risk the region could end up with too much storage withdrawal capacity, according to analysts at Bentek Energy LLC.
By the company's count, more than 30 storage projects to be completed between 2008 and 2010 have been announced for the region. Combined, they would add 304.9 Bcf of working capacity and 17.5 Bcf/d of withdrawal capacity in Texas, Louisiana, Mississippi and Alabama. Bentek breaks the projects into two groups, "most likely" and "less likely." The most likely group includes projects with completion dates targeted by the end of this year. "However, significant increases in storage development costs, various permitting problems and a reduction of the natural gas forward curve for summer-winter differential will likely result in the delay of some projects into 2009," Bentek warned.
These difficulties also will plague the projects with completions targeted in 2009 and 2010. Additionally, these projects face the prospect of fewer LNG cargoes than were originally expected at their conception. Further, many of the Southeast/Gulf Coast projects are backed by financial players seeking a return on investment, not local distribution companies seeking security of gas supply.
"[T]hese financial players can be expected to cut their losses," Bentek said. "The market for facilities in the development stage may quickly become glutted, resulting in a significant reduction in storage values. Should this scenario develop, the economic environment for new storage construction will deteriorate significantly."
Despite this, Bentek still sees the potential for a storage withdrawal capacity overbuild in the region. It is likely that all 11 of the storage projects in Bentek's most likely category will get built within the next two years. Assuming that two-thirds of the 22 projects in the less likely category are canceled, the latter group still represents an additional 3.4 Bcf/d of withdrawal capacity added, and that's on top of 5.8 Bcf/d of withdrawal capacity added by the most likely group.
"The potential consequences of too much deliverability are twofold," Bentek found. "First, during high withdrawal periods, storage gas will compete with increasing pipeline deliveries in the Southeast/Gulf region. Given the constraints on outbound capacity from the region, it is likely that total deliverability from storage and pipeline sources could be restricted. This is particularly true for storage facilities that must compete with LNG terminal sendout on the Gulf Coast and for storage facilities in South Texas that will remain somewhat constrained by pipeline capacity across the Sabine River into Louisiana."
Additionally, more deliverability will effectively cap peak-shaving trading opportunities as the crowd of new storage players will tend to sell into price spikes and dampen volatility. This sets up a scenario of what Bentek calls "trough trolling" where storage players inject during periods of depressed prices and withdraw gas after the return of supply-demand normalcy (see NGI, May 5).
Many of the regional storage projects have been promoted as necessary to absorb the lumpy characteristic of LNG deliveries. The lower probability of significant LNG import increases and a withdrawal overbuild could play into a scenario that entails a "substantial increase in pipeline capacity into the Southeast/Gulf region; steady increases in production to fill that capacity; continued constraints on deliverability out of the region; and modest LNG imports," Bentek said.
"This scenario would be characterized by lower volatility, steadily increasing supplies and periodic constraints on outbound capacity -- factors more favorable to storage that was developed to optimize intrinsic storage economics -- the difference between seasonal market prices. Such storage facilities are generally larger, lower-cost, depleted reservoir facilities," Bentek said.
The findings are part of Bentek's "I of the Storm" report series. The company is working on the third installment.
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