Despite current low prices and decreased volatility that are making natural gas storage plays unattractive, Portland, OR-based NW Natural is sticking with its strategy for operating and expanding merchant storage facilities in the West.
The gas-only utility distribution company acknowledged it is going through tough times with its Mist storage field in Oregon and a new merchant play with Gill Ranch in Northern California, but NW Natural CEO Gregg Kantor said the Oregon utility holding company knows from experience that storage can be a cyclical business.
“Given the projected demand for gas to serve electric generation in the West, we believe in our strategy and the value of storage over the long term,” Kantor said in a letter to shareholders in the company’s 2011 annual report.
In the 20 Bcf capacity Gill Ranch facility in which NW Natural holds a 75% interest with partner Pacific Gas and Electric Co. (PG&E) holding the rest, Kantor said the reservoirs are “functioning well,” and the facility is on track to reach its full injection of the NW portion before the end of this year.
The 16 Bcf Oregon storage facility at Mist is “solid,” Kantor said, although its revenues were lower last year than in 2010, primarily due to its optimization services decreasing due to the current supply surplus.
“Looking forward, our focus on the storage business will remain consistent: execute on our operational plans and identify new commercial opportunities that take advantage of the growing reliance on natural gas,” Kantor said. “With every challenge there are opportunities, so while today’s glut of gas has driven down storage values, it has also provided an opening to lock in long-term supplies for our Oregon utility customers.”
Kantor told shareholders the company also is committed to building more pipeline infrastructure in the Pacific Northwest, given projections for increased gas demand in the region to support baseload electric generation. He said NW Natural’s joint project with TransCanada Corp. to build the Palomar Pipeline will provide added capacity and redundancy for the region.
The company continues to expect growing reliance on gas for power generation throughout the West, Kantor said.
Since 2001, NW Natural has contracted 6 Bcf of Mist gas storage services with interstate customers, and pre-tax revenues from the storage is shared on a pre-set formula basis with local utility customers in both Oregon and Washington. NW Natural operates Gill Ranch, which opened in 2010, and collects 75% of the revenues. Gill Ranch offers storage services to the California market at market-based rates.
In its 10K filing to the Securities and Exchange Commission, NW said it continues to plan further expansion of Mist, despite the fact that the “Northwest storage markets have been negatively impacted by lower gas prices and lack of price volatility, albeit less than in California.” It puts the earliest time frame for that expansion at 2016.
The company sees the possibility of doubling Gill Ranch’s capacity from 20 to 40 Bcf.
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