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Storage Value, Development Predicted to Grow

The gas supply outlook has shifted from a thirst for liquefied natural gas (LNG) imports to reliance on maturing and emerging shale plays in Texas, Louisiana, Arkansas and Pennsylvania; new pipelines and capacity expansions reconfigure continental gas flows; and increasing gas-fired power generation elevates summer demand peaks. Gas storage developers are in the midst of it all.

But they're used to change. More than a decade ago gas from Canada was counted upon to meet shortfalls in the United States. Then new production from the deepwater Gulf of Mexico was seen as replacing declines on the Outer Continental Shelf. Alaska's North Slope gas has been on again-off again for decades. High-priced Asian markets have pinched once highly anticipated LNG imports to a trickle. Rockies gas seeks, then fills, then seeks more pipeline capacity. And if all that weren't enough, David Pentzien of marketer ProLiance Energy LLC blames "regulatory desynchronization" for mismatches in infrastructure development timelines among producers, pipelines and storage.

"What that essentially means is that as a driller, you're captive to one set of regulators," he said. "As a pipeline or storage developer, you're captive to an entirely different set of regulators. What that normally means is [their projects] proceed out of pace and out of synchronization...The fact that they proceed on a different timeline, that presents opportunities for storage as well."

Pentzien was joined by Steve Baker of Spectra Energy's Union Gas, a major Ontario gas utility and storage provider, on a panel discussing the outlook for gas storage at the LDC Forum Midcontinent in Oak Brook, IL, last Tuesday.

Seasonal arbitrage will continue to be a big storage play, the speakers said. Baker said 90-day storage service needs to be valued between $1.50 and $2.50/MMBtu to support new development. Last spring and summer the industry was in the zone, but since about October the value of 90-day service has roamed between 50 cents and about $1.10/MMBtu, according to a chart presented by Baker. But it will come back, he said. "We're going to see a lot more volatility, I think, in terms of interseason spreads."

The speakers predicted that the value of storage to handle intraday gas demand swings by power generators and for meeting higher peaks in summer demand will continue to grow. Responding to a question, Pentzien said growing gas-fired power generation demand in summer was unlikely to compress seasonal spreads significantly. Further, storage has a role in supporting gas-fired generation that backs up new wind power capacity, he said.

Going forward, higher long-term market values will be required to support storage development, Baker said. New fields will be farther from markets and liquid trading points and will require new pipeline infrastructure for interconnection. Additionally, developers will require long-term contracts to support their development efforts as they face significantly higher costs for base gas as well as for capital, he added.

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