Expressing concern about price volatility in the natural gas market, New Jersey, Virginia and Michigan regulators have directed local gas distribution companies to try fixed-price contracts and...
The Gas Storage Market: What Does it Tell Us?
The authors asked pipelines
and LDCs how they used storage.
Leasing activity proved a surprise.
Since deregulation, the natural gas industry has seen tremendous changes in every sector. Competitive pressures have reorganized business strategies so much that only those firms that adapt will survive. One area that stands ripe for change is the natural gas storage market.
Why build gas storage fields?
For the local distribution company (LDC), gas storage fields grew in part from the obligation to serve. Utilities have taken this obligation seriously: Customers have relied on it, state legislators and regulators have enforced it. In some northern states, storage backs up a pipeline's ability to meet supply demand during extended sub-zero weather. Storage also prepares for a possible freeze-off in the production area, sub-zero weather in the market area, or facility-related outages in general. Certainly, no regulator would want to explain to the General Assembly why an LDC could not meet gas-supply demand on a cold winter day. No reason would suffice.
Since few transportation customers existed prior to 1984, most LDC storage fields were built to serve sales customers. In the "old" days, producers produced; pipelines took title to the gas in the production areas and transported it to the city gate where LDCs took title.
The Current Environment
Times have changed. Today LDCs are searching for ways to expand their business ventures. Nonregulated businesses stand high on the priority list. We found that leasing storage to generate cash currently occupies a low priority, but appears to be growing in importance. LDCs often do provide limited-duration storage and balancing as an integral service to transportation customers.
The current environment is dramatically different for pipelines as well. Prior to FERC Order 436,1 interstate pipelines used storage in production areas to ensure supply deliverability in case of weather-related interruptions in the production areas. Before the advent of open transportation, pipelines served only sales customers (em that is, LDCs. A pipeline's obligation to serve differs substantially from an LDC's. Pipelines do not have to provide service to all who request service (em however, a transportation contract imposes an obligation to serve. To meet this obligation, pipelines built storage fields in both production and market areas.2
But in Order 436, the Federal Energy Regulatory Commission (FERC) turned the comfortable world of the pipeline industry upside down. Pipelines have lived through open access, take-or-pay, transition costs, and capacity release. Today competitive pressures force pipelines to be more efficient and aggressive marketers. Storage fields can help ensure reliability, balance gas with gas demands, and increase revenues through leasing. LDCs are learning that they can reduce transportation costs by contracting for interruptible, rather than firm service, and use market storage to backstop deliveries on days when interruptible service is curtailed.
LDC efforts to reduce costs to sales customers by purchasing lower-priced natural gas and storing it for use when prices are higher also impacts gas operations, since interruptible service is less reliable. If enough transporters chose interruptible over firm service, revenue risk should rise.
This article takes a look at the current state of affairs