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Counting on LNG? You'll Need More Storage

Last December U.S. gas markets were throwing a party, but the international guests failed to arrive. The January Nymex natural gas futures contract set an all-time record for a prompt-month settle at $15.378, but still it wasn't enough to entice liquefied natural gas (LNG) cargoes to the Gulf of Mexico.

"Anyone could have hedged that and brought those cargoes into the United States, and more or less adjusted for basis, captured that price if that's what they wanted to do, and yet we didn't see any evidence of that occurring," Falcon Gas Storage CEO John Hopper wondered aloud this week at Ziff Energy's annual gas storage conference in Houston.

Hopper wasn't alone at the Ziff event when he espoused a belief in high winter gas prices to come this year and next and so on. He said he also believes expectations for a dual-peaking market, summer and winter, are overblown. While conceding that he along with others thought gas-fired generation demand would have a bigger impact on the summer market, he noted that industrial sector demand destruction combined with retirement of less efficient gas generation has taken the edge off the summer peak.

In short, old-fashioned seasonal arbitrage is back in a big way, and LNG, along with gas storage capability, will play an important role. Hopper pointed to April futures trading in the $6.50-7.00 range while the January contract is trading around $10.40. "Winter gas is worth a whole lot more than summer gas and that's just what the market says today. Five years from now, 10 years from now, the day after tomorrow, who knows? But right now, today, and over the last three years, that's what the market's been doing."

Matt Morrow, president of Enstor, like Falcon an independent storage developer, also is bullish. "Natural gas storage has never looked better...I can see $15 gas appearing year after year after year."

Also speaking at the conference was Larry Bickle, managing partner of Haddington Ventures LLC, a financial backer of midstream projects including storage, such as the recently announced Bobcat Gas Storage project. Bickle was there to make the case for storage and tout projects backed by his firm.

Not surprisingly, the storage developers and financiers were happy to report that customers will be paying more for their services now than they did in the past. "You shouldn't expect to be able to obtain those services at prices from three years ago because we won't sell it," Hopper said. "We want our share of that storage spread, but we're happy to negotiate an appropriate price for that."

And it should also be no surprise that each storage maven has at least a slightly different take on the best location for and type of storage for dealing with an influx of LNG.

Hopper isn't necessarily looking for that influx to come to the Gulf Coast during the winter months. He noted that Europe has been able to bid cargoes away from the States, even when prices are at historic highs. Vaporization capacity on the Gulf Coast is a sunk cost that LNG suppliers must pay whether they use it or not. If they can get a better netback elsewhere, they'll eat the cost and send their cargoes to Europe, providing they're not under contract to provide the supply. "That's just simple economics. That's just what's going to happen. It's the same thing where you use or don't use firm pipeline capacity," he said.

Previously a developer of salt cavern storage, Hopper said that today reservoir storage is the way to go, particularly if the U.S. is not a destination for wintertime LNG cargoes. Falcon is developing the MoBay Gas Storage Hub in Mobile County, AL. It is expected to be capable of high-deliverability, multi-cycle operation beginning in October 2007 (see Daily GPI, Feb. 16).

"What our customers are telling us today is that most of the value of storage today is in that first cycle because the storage spreads are so big," Hopper said. Each successive storage turnover is worth progressively less. "That hasn't always been the case. Three, five, 10 years ago I would say the opposite was true because you didn't have the contango of peak-to-peak arbitrage opportunities that you have in today's market."

Dana Grams, president of Pivotal Energy Development, a unit of AGL Resources, told Ziff attendees they can expect to see AGL pursue two or three more opportunities to develop "salt dome-type" storage in the Gulf Coast region. Unlike Hopper, Grams expressed much more faith in a dual-peaking market driven by power generation load in the summer. "The summertime peak, because of electric generation load, is growing over twice as fast as the wintertime peak," he said. "If you really think about what will happen in the future, in short order, is that the concept of dual peaking is going to be much, much more important in addressing the market's demand."

Grams talked about AGL's Jefferson Island Storage & Hub facility in Louisiana, the company's first involvement in rapid-cycle storage dating to 2004. Oddly enough, Grams said, regulatory constraints prevent the AGL utilities from making use of the facility, at least for now. Grams, however, has been talking with others on the gas supply side.

"I've had many discussions with large oil companies about whether they need salt dome storage for their LNG imports or not, and they'll all tell you that they do not. But behind the scenes they're all looking for their own salt dome storage opportunities. While salt dome storage is not the only answer for LNG, we think that it is an important price mitigation tool."

Bickle, too, is a fan of salt cavern storage. The Haddington-backed Bobcat project is a salt dome near Eunice, LA, and the Henry Hub. Bickle touts it for being between the South Louisiana production zone and the market area for several pipelines heading north (see Daily GPI, Feb. 27).

Whether one is a salt cavern or reservoir storage fan, developments of both are under way with more surely to come, along with additional pipeline infrastructure, speakers said. Enstor's Morrow devoted his talk to making the case for more storage by refuting what he called "the myths of LNG."

One myth, he said, is that LNG terminal storage will replace traditional storage. The numbers simply don't show that, he said. Existing North American storage facilities add up to capacity of about 4,500 Bcf, by Morrow's count. By 2010, projections call for LNG terminal-based storage of about 76 Bcf at 10 facilities. Further, he said, excess LNG will not dampen price spikes, as the market has already shown this winter. And LNG will not dampen volatility with a steady state of production as deliveries are highly susceptible to delay and diversion.

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