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Gas Storage Outlook Bullish Despite Inventory Levels

With record natural gas storage inventories and a lack of winter weather (until this week), some may not think it's the time to talk about expanding North American storage facilities. But those in the know would beg to differ.

One of those in the know is Jim Bowe, a partner with Washington, DC-based Dewey Ballantine LLP. Bowe, who specializes in energy law, moderated a panel of storage and pipeline executives Thursday at Platts 5th Annual Gas Storage Outlook conference in Houston.

Bowe acknowledged that the relatively mild winter of 2006 and the so-far moderate temperatures of this season have not led to supply concerns (see related story). Differentials "have been crushed," and liquefied natural gas (LNG) imports "are not coming ashore in the quantities we were expecting."

Still, "the overall trends are bullish for storage," said Bowe. Working gas storage capitalization, he noted, has increased nearly 6% since 1998, growing about 1% a year. There's even more pronounced growth in deliverability, which is up 13% in the past seven years. Salt cavern deliverability alone is up 44% in the past seven years -- a trend that "appears to demonstrate the market is demanding higher quality storage."

The "significant increase in deliverability...seems to be what people are after," said Bowe. "There's been tremendous growth in salt cavern storage, and growth in reservoir storage coming from upgrades and well completions."

Another driver for more and better storage: the Federal Energy Regulatory Commission (FERC). The Commission issued a flexible market-based rates storage rule last June, which it upheld in November (see Daily GPI, Nov. 17, 2006). Unlike traditional cost-based rates, recipients of market-based rates may charge whatever the market will bear for their storage services.

FERC's rate ruling will allow it to consider nonstorage substitutes when evaluating whether a storage applicant has market power and may qualify for market-based rates. This expanded definition opens the door to competing nonstorage substitutes that could include available pipeline capacity, supplies from local gas production, LNG and released transportation capacity, which would be available to the same customers served by the new storage operations.

"The recent regulatory developments are bullish," said Bowe. "FERC wants more storage to happen. In close cases, there's a better chance a project will be approved...it leaves a lot to the imagination."

Bowe, who works with FERC on a variety of issues for his clients, said the flexible rule was "an extremely controversial decision within the FERC staff itself." He said he was speaking with one staff member who said "anybody can qualify now" to build a gas storage facility. "He thinks the barn door has been thrown wide open to existing pipelines, and FERC staff is grumbling."

Grumbling aside, the Commission last year approved other rules that point positive for storage developers. FERC issued a final rule to expand the scope of its blanket certificate program to include the construction of certain interstate gas pipeline mainlines, storage field facilities and takeaway facilities for LNG terminals (see Daily GPI, Oct. 20, 2006). Earlier this month, FERC under court order also readopted its former, slimmed-down affiliate rule, Order 497, governing the relationship between gas pipes and their marketing affiliates (see Daily GPI, Jan. 18).

"All of this makes it easier to construct gas storage facilities," said Bowe. "Overall, FERC is giving developers more latitude and streamlining the process. The old affiliate rule, which dropped a lot of the restrictions, may open the door for increased pipeline and storage interactions with nonmarketing affiliates, such as [local distribution companies] LDCs and producers. It may be that life has become simpler. FERC has made clear its exemptions remain alive."

Bowe said the changes to FERC's storage and related rules will lead to some "vigorous debates, but we view this as a positive."

Even though LNG imports have not matched market expectations, Bowe thinks that will change.

"The market perceives the need to develop for rapidly expanding capacity," he said. "It may be that the only way to attract LNG is to exploit our competitive advantages, and that is through storage," he said. "Spain doesn't have storage. Japan does not. And they regularly outbid us for LNG supplies in the winter months. If we can store it in the summer and make it available as regasified supplies at a lower price in the winter, and it's worthwhile, we'll see more LNG."

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