Kenneth L' Beckman

1
Gas Storage Strategies 2004The Impact of High
Prices and Stagnating Supply on Storage Dynamics
Presented by Kenneth L. Beckman International
Gas Consulting, Inc Infocast Conference Houston,
TX September 28-30, 2004
2
The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• In the United States, natural gas storage
  dynamics have been forged by the complex
  interactions of numerous factors, such as natural
  gas prices, gas consumption, regulatory and
  jurisdictional agencies rulings and
  requirements, and financial and economic
  considerations.
• For the period from 1930 through the early 1970s,
  utility regulation and excess supply kept
  natural gas prices very low and gas consumption
  in the U. S. increased at a spectacular rate.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
Early Development of Interstate Pipeline Grid
First Salt Dome Storage
4
The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• An energy crisis developed in the U. S. in the
  mid-1970s. Demand outstripped supply while the
  regulated price for interstate natural gas failed
  to justify new exploration. Intrastate natural
  gas prices rose significantly while annual
  consumption dropped. Wellhead price regulation
  became unworkable.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
Energy Crisis
Early Development of Interstate Pipeline Grid
First Salt Dome Storage
6
The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• The Market demand peaked in 1973, even though
  local curtailments were occurring. FPC Order
  467-B, issued on March 3, 1973, legislated a
  curtailment priority list that placed boiler fuel
  as the first gas curtailed.
• The record cold winters of 1976/77 and 1977/78
  heightened national concern about resource
  abundance.
• The NGPA Act of 1978 further mis-aligned the
  natural gas price-consumption dynamic and prices
  continued to rise while consumption decreased.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
Energy Crisis
NGPA 1978
Early Development of Interstate Pipeline Grid
First Salt Dome Storage
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• In 1985, the FERC enacted Order 436, which
  allowed open access for the large-volume pipeline
  customers. This was followed by Order 636 in
  1992. Full decontrol of wellhead prices, Order
  500, moved natural gas to its so-called
  deregulated status, which reflects todays gas
  markets.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
Energy Crisis
Open Access (1985)
NGPA 1978
Order 636 (1992)
Gas Bubble
Early Development of Interstate Pipeline Grid
First Salt Dome Storage
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Early natural gas storage was created as an
  energy conservation measure to mitigate venting
  and flaring of natural gas from oil wells. Early
  gas storage was also used for seasonal supply
  security and reliability.
• As the transmission pipeline grid grew, storage
  enhanced transmission pipeline efficiency by
  providing near city gate supply sources during
  the winter periods. This allowed the
  transmission pipelines to be more efficient,
  operating at higher load factors.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
In the regulated long-haul transportation and
distribution environment, storage is used 1) to
increase pipeline efficiency, 2) for backup
supply, and 3) to make daily, monthly, and annual
adjustments between supply and demand.
Energy Crisis
Renewed Interest In Storage
Gas Bubble
NGPA 1978
Order 636 (1992)
Open Access (1985)
First Salt Dome Storage
Early Development of Interstate Pipeline Grid
First U. S. Storage Zoar Field
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Changing the natural gas market to a free-market
  structure in the late 1980s created new storage
  development opportunities.
• Deregulation has allowed other entities to
  develop storage. Now, storage can be developed
  not only by transmission pipelines and LDCs but
  also by marketers, traders, and independent
  developers.
• The two key impacts on the storage dynamics 1)
  the deregulation of the storage market, and 2)
  the increase in natural gas price and volatility
  have driven new development.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Deregulation of the gas market has increased the
  number of potential storage developers with a
  finite number of good technical storage
  prospects.
• More competition More risk
• Pricing differentials between pipelines require
  multiple interconnections.
• Location Storage premium
• Volatility capture requires aggressive
  injection/withdrawal capabilities
• Compression, Base gas and Wellbores Investment

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• As the gas supply pricing market has become more
  and more deregulated through successive FERC
  Orders, the gas price volatility has increased.
• The increased gas price volatility has shifted
  the focus from long-term, seasonal storage to a
  much shorter term storage cycle. To capture the
  daily, or even hourly, volatility, the storage
  facilities must have a much higher injection/
  deliverability-to-capacity ratio than for
  seasonal storage. Also, the storage facilities
  must now have interconnections with more
  pipelines to facilitate capturing even more gas
  price volatility.

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NYMEX Volatility ChartsYear-by-Year Average
Daily Price Change
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Developers have recognized the shift in demand
  from seasonal storage to daily storage services.
  This has compelled new storage projects to be
  either salt cavern storage developments or
  enhancements to reservoir type facilities, to
  allow them to emulate the multiple cycling
  ability of salt cavern storage.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• The U. S. has over 3 Tcf of storage working gas
  capacity currently.
• 3 Tcf of this storage working gas capacity is
  regulated as to the price and/or services offered
  to their customers.
• Although the pipeline storage operators have
  designated a substantial amount (approx. 86) of
  their storage for open access activity, the
  majority of this storage is contracted to
  long-term LDC storage.
• LDC core storage customers utilize approximately
  87 of the available storage offered by LDCs.
• Thus, the only liquid storage is a much smaller
  number represented predominately by the
  Independent storage operators.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Today, the natural gas market does not use all of
  the storage capacity available, nor has it in may
  years. Clearly, that unused storage is not
  appropriate for the markets needs. Supply
  shortages are not relevant.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
9/24/04
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Traditional customers still need traditional
  service.
• On the other hand, as the number of
  heat-sensitive (residential) customers grows and
  becomes a larger percentage of the total gas
  demand volume, the total load demand becomes more
  heat-sensitive and more susceptible to extreme
  short-term peak swings.
• This increase in peak swings demand is occurring
  even with the increased energy factors associated
  with new houses.
• As this heat-sensitive peak swing demand becomes
  greater over time it renders demand side
  management (DSM) increasingly ineffective as a
  tool to mitigate the peak demand on any day.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Electric generators need more storage service
  flexibility to meet the changing demands of their
  load profiles.
• The market makers, supply aggregators, and new
  era natural gas middlemen will continue to arise
  to fill the service void created within the
  changing environment in the gas industry. As
  with the UEGs, these type of companies that
  provide gas supply services need the ability to
  satisfy their customers requirements, which more
  frequently requires quick-response storage
  service.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
26
The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• LNG receiving terminal operators will also
  require natural gas management services, which
  will require some form of natural gas storage.
• If tank replacement is the objective, then
  injection capability will be critical for
  efficient tanker ship rotation.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• High base gas prices stopped all storage
  development by the pipeline and LDCs.
• During the mid-80s there was little reason to
  store more gas when it was so cheap, plentiful,
  and had limited summer-winter price differential.
• That situation no longer exists and the storage
  dynamic has changed as a result.
• The evolution of Open Access and a liquid
  commodity market created a financial
  justification for more storage.

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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc
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The Impact of High Prices and Stagnating Supply
on Storage Dynamics Presented by International
Gas Consulting, Inc

• Conclusions
• More storage is needed, but it must meet the
  evolving storage markets requirements
• Efficient cycling
• Multiple supply and market interconnections
• Flexible services
• Incorporation of market makers, supply
  aggregators, traders, etc.

• ltltltltltltltltltltltltltltltgtgtgtgtgtgtgtgtgtgtgtgtgtgtgt
• Gas prices alter the cost, but not the
  desirability, of storage.
• Tightening gas supply emphasizes the need for
  storage as a reliable and secure source.