Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Improving Competitive Position with Natural Gas Storage

Fortnightly Magazine - October 15 1995

or adjusting amount purchased or sold with amount taken or delivered. A salt-storage site could be a market center if it were connected to a diverse set of supply sources and individual customer withdrawals were to some extent independent. Not surprisingly, many analysts see the development of an interconnected network of market centers as the next key step in creating a "seamless" North American grid.

Fungibility of gas between market centers is in part supported by storage operations. If a large price difference occurs between market centers because of a differential change in weather, storage and market center characteristics come into play in several ways. Gas may be withdrawn from storage and released to market where price is high. Simultaneously, this storage reservoir could be replenished from storage sites where gas is relatively inexpensive. The frequency of such transactions depends on the relative constancy, and transparency of the cost of transportation and storage space between market centers and on the flexibility of storage operations.

Available liquid markets and transparent prices at market centers enable storage gas to be evaluated on a daily basis. Transparent prices from liquid markets can be used as indicators of the current value of the gas stored nearby. This fact is notable because in today's gas marketplace the price of natural gas can change abruptly from day to day in response to sudden shifts in demand. During the winter, price tends to increase when daily temperatures decline sharply, and to decline just as quickly when daily temperatures return to normal. When uncertainty about available supplies increases, prices may soar. A company with flexible gas storage could readily release gas from storage to take advantage of these high prices. The greater the deliverability, the greater the expected return. The more flexibility in moving from withdrawing to injecting, the more times the storage user can take advantage of such opportunities.

Prices, Futures, and Premiums

Data from the Henry Hub market center helps quantify the changing value of stored gas over time and indicates how this changing value can be exploited. First, the Henry Hub natural gas futures price implicitly includes cost of storage and cost of money.3 A buyer of gas could purchase a futures contract for a future delivery month and avoid the cost of buying the gas now and storing it, because in some cases the futures price might exceed the cash price at least by cost of storage and cost of money. This situation would tend to occur when there is little uncertainty about the availability of current supplies.

Second, when uncertainty rises over available supplies (during the winter, for instance), spot prices may exceed futures prices. When this occurs, the term "premium" is used to indicate that owners of gas in storage near Henry Hub could obtain a return on each MMbtu (million British thermal units) almost equal to the difference. In fact, they could sell gas from storage at the current spot price and then replace the gas with a futures contract for next-month delivery, making a guaranteed return approximately equal to the premium.4 Alternatively,