With record natural gas storage inventories and a lack of winter weather (until last week), some may think it’s not the time to talk about expanding North American storage facilities. But those in the know would beg to differ.

One of those in the know is Jim Bowe, a partner with Washington, DC-based Dewey Ballantine LLP. Bowe, who specializes in energy law, moderated a panel of storage and pipeline executives Thursday at Platts 5th Annual Gas Storage Outlook conference in Houston. He acknowledged that the relatively mild winter of 2006 and the so-far moderate temperatures of this season have not led to supply concerns. Differentials “have been crushed,” and liquefied natural gas (LNG) imports “are not coming ashore in the quantities we were expecting.”

Still, “the overall trends are bullish for storage,” said Bowe. Working gas storage capitalization, he noted, has increased nearly 6% since 1998, growing about 1% a year. There’s even more pronounced growth in deliverability, which is up 13% in the past seven years. Salt cavern deliverability alone is up 44% in the past seven years — a trend that “appears to demonstrate the market is demanding higher quality storage.”

The “significant increase in deliverability…seems to be what people are after,” said Bowe. “There’s been tremendous growth in salt cavern storage, and growth in reservoir storage coming from upgrades and well completions.”

Another driver for more and better storage: the Federal Energy Regulatory Commission (FERC). The Commission issued a flexible market-based rates storage rule last June, which it upheld in November (see NGI, Nov. 20, 2006). Unlike traditional cost-based rates, recipients of market-based rates may charge whatever the market will bear for their storage services.

FERC’s rate ruling will allow it to consider nonstorage substitutes when evaluating whether a storage applicant has market power and may qualify for market-based rates. This expanded definition opens the door to competing nonstorage substitutes that could include available pipeline capacity, supplies from local gas production, LNG and released transportation capacity, which would be available to the same customers served by the new storage operations.

“The recent regulatory developments are bullish,” said Bowe. “FERC wants more storage to happen. In close cases, there’s a better chance a project will be approved…it leaves a lot to the imagination.”

Bowe, who works with FERC on a variety of issues for his clients, said the flexible rule was “an extremely controversial decision within the FERC staff itself.” FERC Commissioner Sueden Kelly also publicly voiced her disapproval (see NGI, Nov. 20, 2006). Bowe said he spoke with one staff member who said “anybody can qualify now” to build a gas storage facility. “He thinks the barn door has been thrown wide open to existing pipelines, and FERC staff is grumbling.”

Grumbling aside, the Commission last year approved other rules that point positive for storage developers. FERC issued a final rule to expand the scope of its blanket certificate program to include the construction of certain interstate gas pipeline mainlines, storage field facilities and takeaway facilities for LNG terminals (see NGI, Oct. 23, 2006). And last week, FERC under court order also readopted its former, slimmed-down affiliate rule, Order 497, governing the relationship between gas pipes and their marketing affiliates (see related story).

“All of this makes it easier to construct gas storage facilities,” said Bowe. “Overall, FERC is giving developers more latitude and [it] streamlined the process. The old affiliate rule, which dropped a lot of the restrictions, may open the door for increased pipeline and storage interactions with nonmarketing affiliates, such as [local distribution companies] LDCs and producers. It may be that life has become simpler. FERC has made clear its exemptions remain alive.”

Bowe said the changes to FERC’s storage and related rules will lead to some “vigorous debates, but we view this as a positive.”

Even though LNG imports have not matched market expectations, Bowe thinks that will change — all to the positive for storage developers.

“The market perceives the need to develop for rapidly expanding capacity,” he said. “It may be that the only way to attract LNG is to exploit our competitive advantages, and that is through storage,” he said. “Spain doesn’t have storage. Japan does not. And they regularly outbid us for LNG supplies in the winter months. If we can store it in the summer and make it available as regasified supplies at a lower price in the winter, and it’s worthwhile, we’ll see more LNG.”

When new infrastructure is up for sale, “at least a half dozen players” likely will be ready — and able — to bid, which ensures their value will continue to rise, said RBC Capital Markets’ Tim Watson. He is based in Houston as managing director of the firm’s energy mergers and acquisitions. Watson said the value of storage is evident in the number of participants looking for deals. “A lot of different types of buyers and sellers” makes for “a lot of competition.”

Master limited partnerships (MLPs) are among the most competitive bidders, Watson noted. Funded by their gas pipelines, MLPs want the storage as a stable investment. MLPs also want the assurance of having storage available for their pipes. Watson estimated there are more than 50 MLPs now operating in the United States, which is about double the number five years ago.

“Any pipeliners today may be interested in buying storage assets,” said Watson. “MLPs are the dominant buyers…I call this the 21st Century MLP bull market.” However, MLPs face increased competition for midstream assets from a growing cadre of investment bankers and private equity, he said.

“The influence of financial sponsors is not to be underestimated,” said Watson. “They have the money, and they are looking for investments.” Utilities also are moving into the buyers’ market at a growing pace because they “need the physical gas” and can better manage price with storage.

One of the “more fascinating” transactions was EnCana Corp.’s sale last year of its storage assets: AECO Hub in Alberta, Wild Goose Gas Storage Inc. in California, Salt Plains Gas Storage Inc. in Oklahoma and one facility in development, Starks Gas Storage LLC in Louisiana. EnCana eventually sold the assets to Carlyle/Riverstone subsidiary Niska Gas Storage for US$1.5 billion — $500,000 more than it expected to receive, Watson said (see NGI, May 22, 2006).

The bidders for EnCana’s assets were a good example of the competition in the market today, said Watson. A diverse group of buyers is willing to negotiate for however long it takes and in the end, pay a premium.

“It took eight months to put the deal together,” he said of the EnCana sale. “There have been no comparable transactions of this size and few comparable transactions in North America. We ended up putting together a unique mix of business arrangements to accommodate the contracts and the optimization. Buyers today continue to see a shortage of supply space and storage space. The market conditions, combining gas prices and storage spreads, were the key process drivers” for the EnCana sale, but the “fundamentals are still there.”

Watson noted there are “constrained opportunities” to secure midstream assets, matched with “an ongoing cycle of growing financial opportunities. I think the overall strong demand is going to continue. The multiples are strong, and there is continuing participation by all kinds of buyers…Increasingly, the market will have to deal with that.”

Bowe agreed. “There’s a frenzied desire to get into the market. Some will be there every time,” he said of the bidders. Bowe, who also handles acquisitions for energy clients, said, “I haven’t seen any fall off in the interest for storage assets.”

Bowe thinks a big reason for the interest is that “a lot of money is looking for a home in hard assets. The amount of money available to hedge funds, for instance, is just enormous. And there’s the MLP phenomenon. A lot of money is looking to invest in storage projects.”

“At the end of the day, market fundamentals are the primary driver,” said Niska’s Rick Staples, vice president of marketing and optimization. “These assets are in all of the major supply basins. There may be reduced supply in the near term, but there is more supply coming when prices rise and costs drop.”

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