Storage Data Subject to Significant Misinterpretation

The "evolution" of natural gas storage into an arbitrage tool increasingly utilized by marketing companies may be leading some industry observers to misinterpret the results of the American Gas Association's (AGA) weekly storage report and the changes in storage levels over time, according to TXU Chairman David Biegler.

AGA has been concerned that the misunderstanding and the over-reliance on storage data as a predictor of supply is part of the reason gas prices have been so volatile over the past year to 18 months, Biegler said in an interview with NGI last week. "I think a lot of people in the industry don't understand how storage is used today. My personal opinion is that some people are putting undue reliance on the comparison of storage balances of last year and the year before against historical periods without understanding that there was a paradigm shift in the way storage was used."

Biegler, who chaired the reliability council for the Natural Gas Council about the same time the AGA started its weekly storage survey in the early 1990s, recently called for a study to be conducted on storage operations to help educate the public on the changes that have taken place. The new report completed last week for AGA by International Gas Consulting is titled "The Evolution of Underground Natural Gas Storage: Changes in Utilization Patterns."

"It became a concern to me as well as others when we were deciding some of the research and analysis priorities of AGA that a great number of people, particularly, I think, the financial community, don't understand the evolution of storage in this country," Biegler said in an interview with NGI. "It originally was a utility function to back up reliable service and was exclusively used for that purpose, and the sole determinant of how much gas to have in storage was whether it was a rate base item and could you justify having it in storage for reliability. The contrast [is extreme] between that era, which really ended 10 years ago, and today when storage is every bit as much a financial hedge as it is a physical reliability vehicle."

That change should be accompanied by a difference in interpretation of storage levels, according to Biegler and to AGA's Chris McGill, managing director of policy analysis. When there is a discussion about how much gas is needed going into the winter heating season, it is often noted that AGA uses a "universe" of storage of 3.3 Tcf. "It seems like when we get to 3 Tcf or more everybody is feeling robust and noting that we have a lot of gas in storage, and when gas in storage is at 2.7 Tcf everybody is feeling a little squeamish. But I think that's going away. I don't think you can really make judgements on a volumetric basis anymore unless you really understand who the players are that put gas in storage and what they are serving," he said.

"There's a lot of volatility in the gas market, and you can argue whether our report is a part of that volatility...," said McGill. "Is there any basis for trying to determine that perhaps a view of statistics today should be different than it was seven years, or eight years or even 15 years ago?"

The answer to the question, "Is there going to be enough gas in storage when the winter heating season beings?" is always "yes," said McGill, because there's a "cadre" of utility companies out there that must put gas in storage to meet their customer needs. Beyond that there is an economic opportunity, he noted. There is an arbitrage opportunity with having a storage asset and being able to have gas in one place, move it to another and store it some place for a little bit and then move it on to some place else. There's a geographic value as well as a time value of storage, and those aspects are growing in importance with the increasing role of marketing companies in storage management, he noted.

According to the AGA's new study, natural gas pipelines now own about two-thirds of the working gas in storage but only control about 8%; that's all they need to balance their systems. Most of the storage assets today are under contract to LDCs. They have under contract about three-quarters of the capacity. However, they often are not the ones actively managing that capacity. LDCs own only 31% of the working gas in storage. Although marketers or independent operators of storage own less than 5% of the working gas, they actually manage or control nearly 25% of the gas in storage.

"Now you know what those guys [marketers] are doing," said McGill. "They are not only meeting their contractual obligations, they are there to turn that asset into dollars."

Evidence of this can be found in the inventory levels over time in the Producing Region in AGA's weekly storage report, according to the study. The "old rules regarding the quantities of storage required to meet seasonal load variations are no longer valid...," the study notes. "In the last seven storage cycles the peak inventory in [the Producing region] has ranged from 97% of working capacity to as low as 71% of capacity. The inventory levels at the end of the traditional withdrawal cycle have been as high as 55% of capacity and as low as 18% of capacity. Even more telling is the fact that the data shows times when there were withdrawals during the traditional summer injection season and injections into storage during the traditional winter withdrawal season."

Last week was a perfect example of that. AGA reported an unprecedented 3 Bcf net injection for the week ending August 10, with 12 Bcf of withdrawals in the Consuming Region East and zero change in the Producing Region (see related story). According to McGill, "commercial" activity as well as some unusual factors, such as the tropical storm in the Gulf and the heat wave in the Northeast, played a significant role in producing the surprising storage report. The market was expecting more than 50 Bcf to be injected into storage.

Despite this increasing "commercial element," however, storage operations probably have become much more efficient, according to McGill. "Some of our members look at the weekly storage report and see how the prices jump around when the report comes out [on Wednesdays] and they wonder 'Geez, should we even be doing this?' Maybe we are just stirring the pot here every week. But we also see significant price movements on Thursday and Friday and Monday and Tuesday. It doesn't just happen on Wednesday.

"From our members' standpoint, they would probably like to see a more level price and a narrower price band and would like to anticipate a little more into the future." Perhaps educating the public and the financial community about the increasing complexity of storage and its functions will calm the waters, he said.

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