The shale gas boom has sown profits and smiles from wellhead to burner tip, but as gas prices and basis differentials have been flattened, along with traditional seasonal arbitrage, gas storage operators have been excluded from the party.
Last year was “a quiet year in gas storage,” King & Spalding LLP Partner James Bowe told a Houston conference audience Monday. The understatement raised a few titters, but there was little else to smile about for anyone long on cavern space in a shale gas world.
Storage projects developed during the boom years for cavern capacity will be seeing their three- and five-year contracts coming up for renewal. If customers renew, they’ll be re-upping at “pathetic” rates from the perspective of storage operators, Bowe said.
“Nearly all of the growth in storage capacity that’s occurred over the last decade has been gobbled up by merchant players, merchant players, by the way, that are not going to be incentivized to stay around if the storage economics look like they do today,” said BNP Paribas’ Teri Viswanath, director of commodity strategy, at Platts 12th annual Gas Storage Outlook in Houston.
“You’re looking at about 200 Bcf of storage contracts that will come due in the next year…Largely there’s not a reason to re-up these…The fact is we’re going to start to see decontracting.”
Today, putting gas back into the ground to take it out later is mainly just an endeavor for gas supply managers; traders are getting their excitement elsewhere since shale gas abundance has “flattened the forward curve like a pancake,” in the words of Atmos Energy Marketing’s David Tucker, vice president of gathering and renewable energy.
“Storage is not dead, but it is certainly taking it easy right now,” Bowe said. He’s not aware of any new storage projects waiting in the wings, and those that are still in development or expanding are doing it slowly. “It’s a tough market.”
Going forward, the roll for storage capacity will be operational balancing rather than arbitrage, speakers said. Although recent weather has provided hope that there might be some seasonal glory left for gas storage. “This oversupply situation of gas is likely to persist, but I think this winter has exposed some bottlenecks and vulnerabilities in our system that may be taken advantage of by storage,” said AF Energy LLC President Andrew Franks.
“We’re seeing some re-emergence of volatility, but we don’t believe that by itself is going to be the key driver for any incremental storage development or arguably just replacing contracts,” said Scott Smith, Midstream Energy Holdings LLC chief commercial officer. “We believe there are other issues that are going to drive the need for storage contracting…”
Among potential opportunities seen for gas storage capacity by some are liquefied natural gas (LNG) export facilities and gas-fired power generators. However, LNG export facilities won’t need to be calling on underground storage capacity because they have their own, said Dave Sharp, principal of Floridian Natural Gas.
Multi-billion-dollar gas liquefaction and export projects are constructed to be baseload businesses, not peakers, Sharp said at the conference. While the international market for LNG might be a peaking market, the liquefaction and export terminal “looks like a pipeline” to the people who are financing it, and they want it running 365 days a year as a baseload operation, which doesn’t need to be backed up by underground gas storage.
Further, LNG export facilities planned or under construction will have their own storage. “An LNG storage tank is a huge storage facility that provides a tremendous amount of peaking opportunity. When you combine that with the fact that these guys have vaporizers sitting right beside it, you’ve already got a lot of storage built at these facilities to serve any kind of need associated with what they’re trying to do.”
On the power generation side, gas-fueled plants are being called on increasingly to back up growing wind generating capacity, said Ben Schlesinger, president of Benjamin Schlesinger & Associates. With more installed wind capacity, the demand swings are getting harder, he said.
“It’s a real challenge to manage this kind of load using gas pipelines as we know them. Storage is crucial,” said Schlesinger, adding that the market for storage will remain “strong” for seasonal, strategic and price risk management needs.
“Utility service requirements are not going away. In fact if anything, they’re going to increase,” he said. “Managing electric generation demand is an art form. How much firm capacity do you take versus how much do you allow your system to operate on capacity releases and interruptible? It’s still an art form, but the reality is changing the art form more toward a need for firm in my view, and storage.”
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