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Shale Gas, LNG, Power Generation Driving Storage Development

Amid the prolific output of gas shales, the lumpiness of liquefied natural gas (LNG) deliveries and the peakiness of gas-fired power generation demand lies the home of numerous high-deliverability gas storage projects coming on-line now and in the coming years. Storage developers in the Gulf Coast region are betting that their services will be in high demand as the market juggles the volatility of the emerging supply-demand landscape.

One such developer is AGL Resources unit Pivotal Energy Development, which owns Jefferson Island Storage & Hub in Louisiana, is developing Golden Triangle Storage in Beaumont, TX, and plans for a third facility not far away to be called Triple Diamond Storage. Last Tuesday AGL executives hosted Houston area energy reporters at the Golden Triangle site where the company is currently drilling for the first of two caverns, each of which will offer 6 Bcf of working capacity, expandable to 8 Bcf later.

"[T]he idea for us is to have three different salt dome storage facilities connected to as many pipes as we can, connected to over 20 different pipelines, and to be able to provide services between storage facilities to the market," explained Pivotal President Dana Grams. "So eventually we'd like to run all three of these things in tandem. The concept of matching physical and virtual storage together is something that we're moving toward." For instance, Golden Triangle will have connections with Florida Gas Transmission, Texas Eastern Transmission, Kinder Morgan Texas, Centana Intrastate Pipeline, Energy Transfer Co.'s Texoma line and ExxonMobil's Golden Pass Pipeline.

The gas industry is evolving at both ends of the pipeline, and these changes are the inspiration behind Golden Triangle. After Grams joined AGL in 2001, he soon noticed that the peak demand profile of the company's gas distribution utilities was changing. The peaks were growing two and a half times faster than baseload demand, Grams said. Among the reasons for this, he explained, is the popularity of much larger and better insulated homes. Insulation suppresses demand until the temperature drops below about 25 degrees Fahrenheit. After that, "you have a much bigger house that you have to heat," said Grams.

Meanwhile, many of the nation's traditional industrial gas users have moved overseas, taking their steady-state demand with them. And during summer months, growing reliance on gas-fired power generation brings summertime demand peaks to the gas market whenever Americans turn up their air conditioners.

At the other end of the pipe, production from shale plays -- such as the now-famous Barnett in Texas and emerging plays in Arkansas and Louisiana -- is suppressing gas prices and holding global LNG at bay, but not forever, Grams and AGL believe.

"We're a firm believer that LNG has to come into this country," he said. "It's been delayed...but we believe there's 50% more LNG going to be available in the next five years than is currently available. That will have an effect on world prices. And we think the United States and the rest of the world comes into parity in price. Certainly there will be volatility based on demand. That will create opportunities for gas storage."

To be sure, AGL is not alone in seeing that. Another Gulf Coast storage developer is Bobcat Gas Storage, which just placed the first cavern at its facility in St. Landry Parish, LA, into operation. To the east, NGS Energy LP recently received Federal Energy Regulatory Commission approval for its Leaf River Energy Center LLC salt dome facility in Mississippi (see NGI, Nov. 10). Falcon Gas Storage Co. Inc. unit NorTex Gas Storage Co. LLC in the spring had a successful open season for its Hill-Lake and Worsham-Steed facilities in the Barnett Shale region (see NGI, April 7). DCP Midstream LLC subsidiary Centana Intrastate Pipeline said in March it would expand capacity at its Spindletop facility in Beaumont (see NGI, March 10). And last week Atmos Energy Corp. -- which, like AGL, owns gas distribution assets -- applied at the FERC to build high-deliverability storage in northeast Louisiana (see related story). Meanwhile, Sempra Energy's Liberty Gas Storage project in Louisiana faces engineering problems and could be shelved (see related story).

What makes the Golden Triangle site, well, golden, in AGL's opinion: it's near Exxon's planned Golden Pass LNG terminal site as well as the site in Port Arthur, TX, where Sempra Energy is planning an LNG terminal and near Cheniere Energy's Sabine Pass LNG terminal. "We believed this was the easiest site to permit," Grams said.

"The concept of a lot of gas coming into a small region -- thousands of wellheads being replaced by one ship -- tells me that the region will become flooded with natural gas from time to time and that downward volatility will be a large factor in the operations and sales of natural gas by the people who bring it here," Grams said. "The way to look at it is: it's Friday; it's hot across Texas, all of the southeast. Everybody that can generate electricity is doing so using natural gas. And then all of a sudden it starts raining, and the Barnett Shale does not stop. It keeps going through the pipeline. The tankers that are turning into the Gulf of Mexico still keep coming, but the load is 25% less. Where do you sell the next increment of LNG brought into this region on a Saturday afternoon when there's no load?"

Storage is the destination for that unneeded increment of supply.

"Importantly, the type of [storage] capacity under development in recent years has shifted to incorporate not just conventional storage but also salt dome capacity and LNG capacity," Barclays Capital analysts wrote in a Tuesday research note. "Salt has operational advantages, allowing multiple turns (injections followed by withdrawals) within the season, enabling capacity holders to reverse flow to respond to more dynamic market conditions such as summer power demand. As gas-fired generation garners a bigger share of total power generation, the need to increase storage deliverability for the power sector similarly increases, implying a larger share of salt capacity needed."

Grams said he and his company believe that about half of the currently announced storage projects will be built. The Barclays analysts predict that the credit crisis will slow storage development. They estimate that total U.S. working storage capacity is 3,789 Bcf. "End-of-injection season inventory levels have been volatile but have also been growing," the Barclays analysts wrote. "Accordingly, there either needs to be enough storage capacity to handle surplus production, or the market must impose a harsher discipline to balance supply and demand."

So far, one-third of the capacity of Golden Triangle's first cavern has been contracted to a single marketing and trading customer, Grams said. The developer is not anxious to contract the rest, in part to avoid locking in revenue while its costs for materials and labor float with the market. Additionally, LNG and its importers -- whether they be major producers or marketers -- are not yet ready for prime time. Even without LNG, the market offers plenty of volatility to make the Gulf Coast storage play valuable, Grams said.

The shifting of supply basins -- declines in the Gulf, both on and offshore; as well as Canada and the rise of the shales -- is expected to be felt more strongly as the nation leans more heavily on gas for its environmental benefits.

"I think the main driver for us on the volatility part is the fact that there is a new [presidential] administration that is very attuned to the environment," Grams said. "We think that more and more electricity will be generated from natural gas. Of course, when you go and flip the light switch on, nobody changes the flow of natural gas. Someplace is going to have to take swing between the peak hours of the day and the off-peak hours of the night. We think that rapid-cycle high-deliverability natural gas storage, like the salt caverns at Golden Triangle, are going to be more and more valuable in the future."

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