At the dawn of the shale age, "location, location, location" matters as much to natural gas storage projects as it ever did. But robust supplies from shales have helped deflate the New York Mercantile Exchange (Nymex) forward curve, leaving storage developers to ask, "Where did my spread go?"
"The storage market, especially with the low [gas] price environment and the [forward] curve, it's challenging right now," Cardinal Gas Storage Partners CEO Jeff Ballew told attendees at a conference in Houston last week.
However, Ballew allowed that Cardinal has benefited from growing shale gas production from plays such as the Barnett, Fayetteville, Woodford and Haynesville as its projects have been oriented around the Perryville Hub in northeast Louisiana, where much of that gas is directed on its way to markets.
Cardinal owns Cadeville Gas Storage LLC, Arcadia Gas Storage LLC and Perryville Gas Storage LLC. The shale supply shift has caused a midstream requirement for a lot of infrastructure. "It started with a lot of large-diameter pipe, so they're running west to east to get to market across our North Louisiana focus," Ballew said. Besides pipelines, processing and compression, storage was needed, too, in the region. "Our focus was to be the storage answer to that component."
Ballew said he's optimistic that the gas market will turn and be more supportive of additional storage development. "We know it's a cycle. We've all seen it. Depending on what we all believe internally about how much coal-fired [generating capacity] is going to get converted [to gas], what the economy is going to do, we all think our projects are worth it or we wouldn't be here spending money on them. Hopefully the market responds so we get to put them together."
With a storage facility in Kern County, CA, Tricor Ten Section Hub LLC is a good distance away from the shale gas rush. However, since the independent storage facility is at an intersection of western interstate and intrastate pipelines in a market area, it can still enjoy some volatility and the storage spreads that come with it, Managing Director Christopher Kunzi said. The location of his company's storage asset allows it to take advantage of arbitrage opportunities "well beyond the base tariff revenue," and there are also "micro opportunities" presented by the Nymex curve, he said.
"The West is generally 'understored' as compared to the eastern two-thirds of the country, so I think there's room for a fair bit of development to go on out there," said Chris Jones, a copanelist with Kunzi at Infocast's Gas Storage Finance, Investment and Strategy Summit. Jones is managing director at Haddington Ventures LLC, which has invested in a number of storage projects. "There's no doubt that basis collapse, price collapse, etc., etc., have dampened your financial counterparties...They just look at the curve and whatever the curve tells them that day is the price that they're willing to pay.
"So...we'll wait for the curve to come back because I think volatility in the long run will likely increase and the value of storage will increase as well. We're not interested in selling storage services at too cheap a rate. I'd say we've turned our focus to talking to more strategic folks that have reasons for wanting to own storage for 10, 20 or 30 years either as a long-term lessee or as a coventurer on the gas side."
Drillers in shale plays will ultimately have to lay down some rigs, Jones said. "Eventually capital market disappointment will force those guys to stop. When they do, deliverability will fall rapidly because of rapid decline curves; then all the LNG [liquefied natural gas] starts showing up and volatility will increase. I would say just be patient in this period of time and don't do anything stupid."
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