Because "...demand for and the prices being paid for natural gas storage services in the Gulf Coast region have declined substantially, particularly over the past year," Tres Palacios Gas Storage LLC has asked FERC for authorization to abandon up to 22.9 Bcf of working capacity at its three-cavern facility in Texas.
Customers are unwilling to pay for firm gas storage service at rates that would allow Tres Palacios to turn a profit, the company said. Abandoning some of the facility's firm capacity would allow Tres Palacios to reduce lease payments made for unneeded cavern capacity to an affiliate of Texas Brine Corp.
"There is some urgency here: in order to realize savings in cavern capacity lease obligations which are critical to its long-term success and its ability to provide cost-competitive services, Tres Palacios needs to reduce its certificated working gas storage capacity in early 2014 to reduce its lease expenses for the balance of the year and beyond," the company told the Federal Energy Regulatory Commission.
Tres Palacios said 40% of its certificated 38.4 Bcf of working capacity is committed under firm service agreements, with commitments covering 9 Bcf set to expire on March 31.
"Abandoning up to 22.9 Bcf of its certificated working gas storage capacity will enable Tres Palacios to align its certificated working gas storage capacity with current market demand," it said. "The company proposes to spread the capacity reductions over its three caverns in a manner that will enable it to optimize its operations and minimize operating expenses, while remaining able to meet all of its contractual obligations and to provide highly flexible injection and withdrawal capabilities to its customers."
Tres Palacios isn't the only gas storage operator, particularly in the Gulf Coast region, to find its caverns largely bare. Peregrine Midstream Partners CEO John Hopper recently told NGI that demand for storage has been down and speculated that a sustained cold winter would squeeze supplies a bit, bring back some price volatility and cause customers to rethink the value they place on storage (see Daily GPI, Dec. 2).
It its FERC filing, Tres Palacios cited the same reasons that Hopper did for the tough times facing storage operators: "...historically low natural gas prices, substantial reductions in natural gas price volatility and in winter/summer gas price spreads, and the increasing availability of gas from shale plays and other prolific gas supply sources in many regions of the U.S., including Texas."
Shale gas and the absence of volatility are being felt at IntercontinentalExchange (ICE), too. CEO Jeffrey Sprecher said Tuesday at the Goldman Sachs Financial Services Conference. "...[O]ur open interest in natural gas is high," he said, "but volatility has been relatively low for the last year or so. I would tell you month-to-date, natural gas is up 30% year over year...Why is that? Well, it's really cold out...
"What you really have seen here is a pretty temperate environment in the United States over the last year. But who knows what this winter will hold for us...What we can control and what we can do is expand the footprint of the business, which we've been doing despite the low volatility. So I'm bullish on natural gas."