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Technology Corridor

Fundamentals in the energy markets are converging to increase the need for incremental gas storage.
Fortnightly Magazine - July 2004

supply will continue struggling to keep pace with natural gas demand overall. The higher gas prices associated with tighter gas supply might help by forcing out some of the base-load industrial demand; this is known as demand destruction.

Liquefied natural gas (LNG) will provide some supply, but it is not expected to provide enough supply to remedy this overall imbalance. However, it will either be base-loaded to help recover the huge infrastructure investments, or, if a spot market for LNG cargoes develops, LNG may be more plentiful in the summer, when there is less competition from the predominately northern-hemisphere worldwide LNG markets. Regardless, LNG would not seem to be a solution for market imbalances.

Gas is one of our most environmentally friendly fuels and will continue to be one of the quickest energy forms to dispatch. For a dramatic illustration of this point, consider the Northeast blackout of 2003, and the time it took for nuclear- and coal-fired plants to return to full capacity.

The higher gas prices the industry has seen over the last year may drive base-load demand to other energy sources, or it could lead to demand destruction. One might infer that a reduction in base-load demand would free up supply to help serve the peak demand days, but the truth remains that total demand is not forecasted to drop. If base-load demand is reduced, while overall demand grows, then clearly the need for balancing is increased.

Alternatives to gas storage for balancing the market are not attractive. Fuel-switching as a means of balancing gas markets is not a good alternative, since it is slow to respond, depends on conditions in other correlated energy markets, and has quite unpredictable costs that depend on the prices of other commodities. Fuel-switching is more likely to contribute to gas market imbalances, rather than solve them.

The Market Fundamentals

Let's take a different approach and apply simple economics to gas storage. Most storage capacity now uses naturally formed geologic pockets. What does Mother Nature have to say about the potential to add new, low-cost, high-performing storage capacity in ideal market locations? Keep dreaming. The best opportunities already have been largely developed, leaving mostly lower-quality but higher-cost prospects.

Working storage capacity in the United States slowed dramatically in the 1980s, after steady growth for 40 years. Gas consumption had peaked a decade earlier, and then fallen off.

Only recently has consumption surpassed the early 1970s peak. So storage development naturally slowed down in response to the leveling off of natural gas consumption. Regardless, a surplus of storage capacity existed by the 1980s, allowing for steadily increasing use of that capacity over the next few decades, without needing to add to the infrastructure.

Locating New Storage

The storage reservoirs in the best locations were developed during the industry's dramatic growth period from 1950 to the mid-1970s. Now that we need more storage capacity, where will it come from? Incremental storage increasingly will be in poorer quality reservoirs, farther from ideal locations, and therefore more costly to develop to provide new storage services. The next best