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Fundamentals in the energy markets are converging to increase the need for incremental gas storage.
The natural gas market is approaching a dramatic turning point. The fundamentals in the energy markets are converging to increase the need for incremental gas storage and the way that storage is used and valued by the customer community. Why is new storage needed? What will it take for new storage to be developed? What do customers need to commit to new storage projects? And how does the energy industry get all of these items reconciled?
The natural gas industry has always had a fascination with storage levels. Storage levels are used as a barometer for gas supply-and-demand trends. The industry traditionally has used the level of storage to predict seasonal gas utilization and prices. In some cases, storage levels have acted as a magic crystal ball, holding the secrets of near-term and future natural gas demand, supply, and pricing. However, the focus on how full storage levels are overlooks the more serious question: What do we do when fully utilized storage capacity is not enough to get us through the winter?
Traditionally, storage has been filled during the summer, when demand (in theory) on the pipelines and the cost of natural gas is lower. Gas is taken out of storage during the colder winter months to fill peak-day needs. With an increasing amount of electric generation being supplied by natural gas-creating growing summer demand on pipelines and more stable summer prices-the way the industry views and values storage is rapidly changing.
The Correlation Between Storage and Pricing
As we can see in Figure 1 (see p. 62), a lack of storage capacity can constrain the market's ability to adjust. The gas shortage in the winter of 2000-2001 was partly caused by the industry not maximizing storage in the previous season. The industry saw a dramatic price rise when it recognized there was not enough gas in storage. When the industry responded with increased production, it was amazing how fast the current storage infrastructure ran out of room; and how fast the price went down in response.
Gas Storage Demand
Natural gas is the most easily dispatchable fuel, and as such is gaining an increasing share of the more volatile market sectors. Recent conventional wisdom has suggested that gas-fired power generation will create a summer demand peak that tends to balance out the winter peak. Yet in many regions of the country, there will continue to be electricity demand peaks in the winter. The data in Figure 2 suggest that the imbalance between summer and winter demand is growing faster than the overall gas demand. The 2003 study by the National Petroleum Council (NPC) examined the monthly patterns of demand and supply, not just annual averages. The NPC study projects a steadily growing imbalance between average winter and average summer demand.
An analysis by EnCana Gas Storage also suggests that a trend already exists of increasing storage withdrawals per heating degree-day, meaning weather-sensitive demand is increasing. The NPC analysis suggests that natural gas