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Storage Changing With Entry of Marketers

Storage Changing With Entry of Marketers

While storage operators are pleased with the abundance of gas inventory built up this summer, they are a little concerned about recent changes in storage dynamics as more marketers take title to storage capacity from LDCs.

Storage held by local distribution companies and power generators typically has been used to ensure supply. But marketers holding storage or optimizing storage assets under contract with LDCs see storage as a financial opportunity in addition to a supply insurance policy.

The arbitrageurs will handle their storage differently when supplies get tight, said Pete Kinsella, Columbia Gas Transmission vice president of marketing and volume management. "You have diversity in the holders of firm storage, and with that comes a broad spectrum of agendas on the part of the users, which just makes operating and selling storage a little bit more challenging."

Picture this scenario: an extremely cold December with price spikes. LDCs would draw down some storage but still would buy a lot of gas on the market and pass the higher gas prices through to their customers, Kinsella said. Marketers holding storage would view the cold weather and attendant high prices as a financial opportunity and would draw from storage more heavily. "This is going to be the first winter where we see a good chunk of firm storage actually owned by marketers. They're not just acting as agents for LDCs. We're going to be taking a look with interest at what they're doing this winter."

Marc Tronzo, vice president of Woodward Marketing, which manages the storage of a number of LDCs, agreed. "As more utilities turn their storage over to marketers to manage their assets, you're going to see just more pure financial storage trades than you would operational storage." James W. Hart, vice president of commercial services for Columbia Gulf Transmission, also has seen a shift in the way storage is viewed by the industry. "It has reached the point now where the economics are the driver, and I don't see anything changing that. There may be some enhancements. There may be some impact as the electric unbundling matures. You may see gas storage as a surrogate to electric storage."

As storage becomes more of a financial play, it could place more demands for operational flexibility on storage operators. "I guess the pipelines in the past have kind of had a lot of leeway with storage," Tronzo said. "The pipelines were left with more operational latitude because the utilities weren't optimizing. The pipelines had a lot of latitude in the past to operate their system however they wanted. In the future, when the price goes to four bucks and everybody has gas in storage. everybody's going to be trying to bust gas out of storage."

LDCs' storage costs are passed through to customers, but as more marketers hold storage, it could put downward pressure on storage prices. "Before, storage was basically driven by the need to have the gas available, and people were not so much concerned with the carrying costs," Hart said. "Now the owners of storage are looking at how they will price that in the upcoming season. Now people are looking at it as, 'Well, can I cover the fees associated with storage. Can I cover the time value of money, and can I make a profit on top of that at some reasonable rate of return. Everything is being driven by the economics now as opposed to the public convenience and necessity."

As for current storage levels, they're high, to say the least. The American gas Association reported working gas as of Aug. 21 was 2,615 Bcf, or 82% full. PaineWebber's Natural Gas Group noted for the same week in 1997 storage was 66.7% full, and it was 63.7% full for the same week in 1996. "Barring any supply disruptions (such as hurricane activity in the Gulf of Mexico), we expect continued weakness in wellhead prices for the next two months before heating demand begins to support and later lift gas prices."

National Fuel hasn't seen all that much difference in storage operations this year compared to last year, said spokeswoman Julie Coppola. "At about this time last year on Sept. 1st of 1997, we had 135 Bcf of gas in storage, and today we have 141 Bcf of gas in storage." National Fuel's single largest storage customer is National Fuel Gas Distribution.

Storage customers have been able to take a wait-and-see approach to injections this summer, noted Coppola and Kinsella. "We were light on withdrawals last year just because it was such a warm winter. There wasn't as great a need in terms of total volumes to be injected this summer. It gave the customers more flexibility. They had more flexibility in that they had less to inject over the course of the summer so they could take some wait-and-see approaches. Certain months they were hitting it pretty hard, and other months we saw them kind of back off."

Joe Fisher, Houston

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