Although the industry probably won’t have difficulty attaining a near record level of gas in storage for the upcoming heating season, some observers would like to see the federal government exert more control over storage to ensure there is sufficient gas in reserve on a regular basis throughout the year to keep downward pressure on gas prices.

The idea of forming a strategic natural gas reserve (SGR) much like the Strategic Petroleum Reserve currently used by the government in the crude oil market was presented to Congress earlier this month by Wenonah Hauter, director of Public Citizen’s Energy Program. Hauter noted that high gas storage levels and reports of large storage injections historically have pressured gas prices lower. In fact for years there has been a strong correlation between gas storage levels and prices, although recently that correlation has weakened.

Gas prices this month rose to more than $7/MMBtu at the same time there were widespread expectations that there would be a record high level of gas in storage entering the upcoming winter heating season. Part of the reason for recent price spikes undoubtedly was the 1.8 Bcf/d of gas production remaining shut in because of damage from Hurricane Ivan in the Gulf of Mexico. The Minerals Management Service also has indicated that it could take more than six months for all of the current gas that’s shut in to return to the market.

There also is the soaring crude oil market and the tight natural gas supply-demand environment. Domestic dry gas production is expected to fall 1% this year, and gas imports from Canada are expected to fall 0.9%, while total domestic demand is expected to rise 0.3%, according to the Energy Information Administration.

But Public Citizen believes the current marketplace is being driven more by manipulation and speculation than by simple market fundamentals. Gas prices finally began to fall on Tuesday, but remain well above levels at any time in the past when storage was as high as it is currently.

The strategic gas reserve could only help put more down pressure on prices. And Public Citizen said it would have to be only one component of a much larger program to battle manipulation and its impact on the natural gas market.

Public Citizen hasn’t figured out exactly how the federal government would obtain enough storage capacity and natural gas off of an already tight market to build a gas reserve, but at least it looks like a good idea on paper.

“We haven’t really developed an enormous amount of detail about proposing specific sites or exactly how it would work,” said Tyson Slocum, research director at the organization. “But up until recently domestic demand trends have always been a consideration before the government orders any petroleum into the salt caverns of the oil reserve. Of course, we would have to take into account any domestic demand trends.

“But the point is that I think that there are opportunities where the industry has lagged behind in putting adequate gas in storage at times of lower demand. I think that is a place where we can have increased regulation,” said Slocum. “There is no question that there have been problems with under-regulation of natural gas players. A number of gas companies have been found to have engaged in illegal or improper types of activities regarding trading and storage data. Increased government involvement in this is necessary.”

Slocum said this idea has been presented to members of Congress with the hope that they would take an interest and develop more details. “This would be a secondary reform that would become more important once there is some improved price transparency on the futures and over-the-counter exchanges,” he said.

He said this step of reforming the exchanges, and requiring market participants to fully disclose their positions on a timely basis, is necessary to reestablish the strong correlation between natural gas storage levels and gas prices.

“There’s no question that you are always going to have environmental issues, such as damage from the hurricane, going on and affecting prices, but since 2000 natural gas prices have been significantly higher and there’s really not a lot of fundamentals that adequately explain it,” said Slocum.

“I think the bigger explanation can be found in the billions of dollars in penalties and other settlements that federal agencies and state governments have entered into with natural gas companies. There has been widespread manipulation and a lot of it stems from the combination of loosening regulations over trading markets and retail and wholesale electricity deregulation.”

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