While storage operators are pleased with the abundance of gasinventory built up this summer, they are a little concerned aboutrecent changes in storage dynamics as more marketers take title tostorage capacity from LDCs.

Storage held by local distribution companies and powergenerators typically has been used to ensure supply. But marketersholding storage or optimizing storage assets under contract withLDCs see storage as a financial opportunity in addition to a supplyinsurance policy.

The arbitrageurs will handle their storage differently whensupplies get tight, said Pete Kinsella, Columbia Gas Transmissionvice president of marketing and volume management. “You havediversity in the holders of firm storage, and with that comes abroad spectrum of agendas on the part of the users, which justmakes operating and selling storage a little bit more challenging.”

Picture this scenario: an extremely cold December with pricespikes. LDCs would draw down some storage but still would buy a lotof gas on the market and pass the higher gas prices through totheir customers, Kinsella said. Marketers holding storage wouldview the cold weather and attendant high prices as a financialopportunity and would draw from storage more heavily. “This isgoing to be the first winter where we see a good chunk of firmstorage actually owned by marketers. They’re not just acting asagents for LDCs. We’re going to be taking a look with interest atwhat they’re doing this winter.”

Marc Tronzo, vice president of Woodward Marketing, which managesthe storage of a number of LDCs, agreed. “As more utilities turntheir storage over to marketers to manage their assets, you’regoing to see just more pure financial storage trades than you wouldoperational storage.” James W. Hart, vice president of commercialservices for Columbia Gulf Transmission, also has seen a shift inthe way storage is viewed by the industry. “It has reached thepoint now where the economics are the driver, and I don’t seeanything changing that. There may be some enhancements. There maybe some impact as the electric unbundling matures. You may see gasstorage as a surrogate to electric storage.”

As storage becomes more of a financial play, it could place moredemands for operational flexibility on storage operators. “I guessthe pipelines in the past have kind of had a lot of leeway withstorage,” Tronzo said. “The pipelines were left with moreoperational latitude because the utilities weren’t optimizing. Thepipelines had a lot of latitude in the past to operate their systemhowever they wanted. In the future, when the price goes to fourbucks and everybody has gas in storage. everybody’s going to betrying to bust gas out of storage.”

LDCs’ storage costs are passed through to customers, but as moremarketers hold storage, it could put downward pressure on storageprices. “Before, storage was basically driven by the need to havethe gas available, and people were not so much concerned with thecarrying costs,” Hart said. “Now the owners of storage are lookingat how they will price that in the upcoming season. Now people arelooking at it as, ‘Well, can I cover the fees associated withstorage. Can I cover the time value of money, and can I make aprofit on top of that at some reasonable rate of return. Everythingis being driven by the economics now as opposed to the publicconvenience 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 was2,615 Bcf, or 82% full. PaineWebber’s Natural Gas Group noted forthe same week in 1997 storage was 66.7% full, and it was 63.7% fullfor the same week in 1996. “Barring any supply disruptions (such ashurricane activity in the Gulf of Mexico), we expect continuedweakness in wellhead prices for the next two months before heatingdemand begins to support and later lift gas prices.”

National Fuel hasn’t seen all that much difference in storageoperations this year compared to last year, said spokeswoman JulieCoppola. “At about this time last year on Sept. 1st of 1997, we had135 Bcf of gas in storage, and today we have 141 Bcf of gas instorage.” National Fuel’s single largest storage customer isNational Fuel Gas Distribution.

Storage customers have been able to take a wait-and-see approachto injections this summer, noted Coppola and Kinsella. “We werelight on withdrawals last year just because it was such a warmwinter. There wasn’t as great a need in terms of total volumes tobe injected this summer. It gave the customers more flexibility.They had more flexibility in that they had less to inject over thecourse of the summer so they could take some wait-and-seeapproaches. Certain months they were hitting it pretty hard, andother months we saw them kind of back off.”

Joe Fisher, Houston

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