Supply Shortage, Soaring Prices Should Put Storage in High Demand, Developers Say
Without mega-marketers eager to make a quick buck, gas storage developers have faced more of a challenge in recent months. But this winter's strong Northeast demand, record high gas prices in New England, growing supply shortage and soaring volatility make a stronger case than ever for high-deliverability storage, according to two project planners.
"You've got people paying 10-60 bucks for their gas when they were paying $4 earlier this year. That makes them tend to think that storage could be a valuable part of their energy portfolio," noted Mark Cook, principal of SG Resources, which has two proposed salt dome storage projects planned in the Gulf Coast region.
However, seeing the value of storage is a far cry from actually extracting the value after signing a long-term capacity contract. In the past, one marketing official at a major merchant energy company could make a decision to buy 3 Bcf of storage capacity under a five-year contract with $2-3 million/year in demand charges.
Today, many storage developers have to go through a long chain of command and control at the utilities that begins with low level management but eventually leads all the way up to the board of directors and then through the state regulatory commissions. What used to take several months of negotiations is now taking well more than a year, sometimes much longer.
"I used to be able to fly to Omaha, meet with the guys at Aquila, play golf for three days, have dinner and then I would fly back with a five-year firm contract," said Cook. "Now it is taking a much longer time just because of the structure of the utility business."
"The face of the market has changed," agreed Mark Fullerton at Falcon Gas Storage, which is planning several new storage projects, including the 20 Bcf MoBay project in Mobile, AL, and the 6.1 Bcf Wycoff project in Steuben County, NY. "You used to go to folks at El Paso, Duke, Enron and Aquila, make a presentation to them and say, 'Hey this is how you can pay us this much for this storage and still come out with a lower cost of gas or just make money.' People could make a reasonably quick economic decision on that and sometimes in advance of a project so that you could use them as an anchor tenant to help you with your financing. That's all gone now. Those guys don't even exist anymore."
Fullerton said it's much harder to put a number on the value of reliability. First, the utility has to decide for itself whether it will be hedging price risk or buying storage to ensure the supply will be there when needed. The value is different in each case. In the Southeast, Fullerton believes local utilities are just sitting around waiting for each other to make the first move so they can have some market direction.
"They don't want to look imprudent and get this demand charge hung around their neck so the [public utility commission] and upper management can beat them about the head with it," he noted.
Cook said that in SG Resources marketing program for its 6 Bcf Pine Prairie Energy Center in Evangeline Parish, LA, the company submitted a bid last March as part of a request for proposals to provide storage services to a Southeast utility company. "I've talked to these people again this week," he said. "I've made the cut up to a certain point. There are only two to three more facilities that they are still evaluating and they are going to make a decision in March or April. Well, it's been a year!"
The longer lead times in contracting have taken a toll on small storage developers. Investment banks demand contracts, and utilities are slow in signing them. It makes it tough to stay above water.
But both Fullerton and Cook are optimistic that the situation will improve, perhaps soon because of the price of gas, the shortage of gas and the volatility in the marketplace. "The basic need for high-deliverability storage is not decreasing at all," said Fullerton. "As supply gets tighter and volatility gets higher, it continues to cry out for deliverability."
There is a steep learning curve utilities now must climb. Marketers aren't out there anymore providing assistance. "Storage is absolutely needed more now than ever, but the decision is just going to take a little longer," Cook said. He noted that a recent open season for Pine Prairie drew significant market interest.
SG Resources hopes to file an application for Pine Prairie in the first quarter, but it probably will not be in service before fall of 2005. Its 12 Bcf Southern Pines Energy Center already has a FERC certificate and originally was supposed to be in service at the beginning of 2003. But now SGR hopes to begin construction sometime during this quarter.