Introduction
New underground natural gas storage and market center hubs have been among the most dynamic aspects of the evolving North American natural gas markets. These developments stem fiom the impacts of FERC Order No. 636, which potentially increased the service value offered fiom these facilities. In particular, the Order shifted the responsibility of supply arrangements to end-use markets and mandated the change to straight fixed-variable rate design.
This report, prepared by Foster Associates on behalf of the INGAA Foundation, examines underground storage and market hub characteristics. We present an inventory of storage projects, including location, ownership and capacity of existing facilities as well as new and proposed projects, and discuss the underlying uses and relative benefits and costs. Market hubs are also discussed, with special attention given to developers, location, services offered, and how these services relate to other products offered in the market. Two appendices to this report describe many of the storage projects and market hub projects that are in various stages of development. Information in these descriptions is based on marketing information provided by developers, supplemented by publicly available data.
Underground Storage
- About 400 underground storage facilities are currently in operation across the U.S., offering 3.5 Tcf of working gas capacity and 70 Bcf per day of deliverability. In addition, 10 underground storage facilities are operating in Canada, with working capacity of 440 Bcf and deliverability of 7 Bcf per day.
- Market share of U.S. storage by type of owner is summarized on the following table.
Table 1 - While interstate pipelines own 61 percent of the U.S. working gas storage capability, theyhave contracted the vast majority of storage capacity to their customers, primarily local distribution companies (LDCs), retaining an average of 13 percent of the 61 percent of U.S. working gas capacity for operational needs and to provide no-notice service.
- WCs own 30 percent of the U.S. storage capacity, with the largest concentration of ownership in the East North Central area and in California. Total WC control of working gas storage capacity is 83 percent, including their ownership and storage contracted from interstate pipelines.
- Traditionally, LDCs have invested in and contracted for storage capacity primarily to meet their seasonal and peak day requirements. However, the recent unbundling of services at the WC level has resulted in LDCs offering storage on a contract basis to third parties, both onsystem and offsystem customers. A survey of the largest WC storage owners found that those controlling 80 percent of the working gas capacity do offer storage service to third parties.
- Gas storage capacity ownership in Canada differs from that in the U.S. In total, Canadian producers own 31 percent, distribution companies own 55 percent and pipelines own 14 percent of the total working gas storage capability.
- About 60 new storage facilities in the U.S. are proposed or are in various stages of development. If all of these facilities were to be constructed (which is unlikely), they would add almost 500 Bcf of working gas capacity and about 19 Bcf per day of withdrawal capability, or 14 and 26 percent, respectively, to existing storage capacity and capability.
- In Canada, LDCs and producers are the primary developers of new and expanded storage, with a proposed total of 62 Bcf of working gas or an increase of 14 percent.
- Several reasons exist for the current interest in gas storage: (1) improved competitive positioning of storage services (e.g., impact of shifting to a straight fixed-variable cost allocation and rate design methodology and unbundling of pipeline services); (2) new services offered by storage (e.g., market hub services); (3) new market demand potential (e.g., power generation); (4) potential for market-based rates; (5) development of multiuse storage facilities; and (6) desire to take advantage of short-term price fluctuations in gas supply costs.
- New gas storage facilities differ in many important respects from traditional storage: (1) storage developers are now a diverse group, and many are developing storage capacity on a stand-alone basis, with success based upon its relative economics, rather than as a means of meeting bundled service requirements; (2) many storage projects are being developed as joint ventures; (3) several storage projects have requested and obtained FERC’s permission to offer services at market-based rates; (4) storage providers are advertising much greater flexibility of services and in many instances these services are "customtailored" to customer specifications; and (5) over 60 percent of new storage deliverability is being developed in salt dome facilities rather than depleted fields and reservoirs.
- Important and desirable storage facility characteristics include the following: (1) relatively high withdrawaVinjection capability and fast turnaround capability; (2) relatively high volume of working gas as a percentage of total gas (e.g., low cushion gas requirements); (3) ability to increase reservoir pressure without leaking gas into adjoining formations; (4)potential of native gas to be used as cushion gas; and (5) location in shallower reservoirs,thereby reducing drilling costs.
- One important consideration of storage is location, i.e., market area or production area. Storage location relates closely to how it is used, its ownership and its relative economics. Production area storage can be used by suppliers to improve operational efficiency by leveling wellhead production rates and pipeline throughput volumes. Market area storage is traditionally used to improve market efficiency by meeting peak and seasonal requirements, resulting in higher load factors for long-haul transmission capacity.
- Underground storage capability is spread throughout the U.S., with heavier concentrations of market area storage in the North Central (West and East) and Middle Atlantic regions, and production area storage in the West South Central region.
- The three types of underground storage facilities are depleted oil and gas fields, aquifers, and salt caverns. The table below presents several statistical characteristics of the different storage reservoirs.
Table 2 - The relative economics of storage are complicated by the variety of benefits offered by storage on the one hand and the array of rates and associated costs on the other. To an important extent, the benefits relate to the type of business of the user, as well as the storage location. Producerslmarketers derive benefits from greater field production efficiency, contractual advantages, and the use of storage as a risk management tool. The economic value of storage to interstate pipelines is lower today than under a bundled sales environment; pipelines’ need for storage has been reduced to quantities that support nonotice service and pipeline operations. Local distribution companies (and end users) derive the greatest value from storage. Benefits of storage to LDCs include the following: (1) assistance in meeting seasonal and peak day demands, thereby minimizing firm transportation and/or no-notice service requirements; (2) enabling levelized or off-season gas purchases; and (3) a risk management tool.
- The storage user must weigh the aggregation of the components of storage costs against the benefits in order to decide if storage is economical. Total storage costs include the cost of storage itself, fuel costs, costs associated with transportation capacity to and from storage, and the inventory cost of holding gas in storage. Because of fixed reservation (deliverability) charges for firm service, the average cost level for high deliverability storage can be significantly reduced with multiple cycling capability that spreads the demand charge over greater volumes. In addition, storage costs to meet needle peak demand (e.g., 10-day service) are higher than the cost of meeting seasonal requirements (e.g., 100-day service), because the former requires a higher daily contract demand level for which a monthly reservation charge applies.
Market Hub
- About 35 major market centers and hubs have sprung up across the U.S. and in Canada. Few of these existed prior to the implementation of FERC Order No. 636. Those that did exist were primarily market centers or locations of multiple buyers and sellers in the producing areas.
- Market centers become hubs by offering a greater menu of services, including parking, loaning, wheeling and title transfer, as well as electronic trading at the hub and between hubs. While these services are now advertised, they are defined less specifically than other gas industry services and are evolving as dictated and/or requested by customers.
- Hubs are being developed and promoted by various industry participants — pipelines, distributors, producers, marketers and independent operators. The services they provide depend on the hub location and available facilities.
- Many hub services are being provided alongside other services being offered by LDCs and pipelines. To some extent, therefore, these services can be considered as by-products of the main services offered by these companies. As a result, certain issues have evolved –firm versus interruptible service obligations, regulatory jurisdiction and revenue sharing.
- Two of the more important hub characteristics are the number of pipeline interconnections (along with associated capacity) and the availability of storage capacity. Hub promoters generally advertise the number of interconnecting pipelines, directional flow and capacity, proximity to more important centers (e.g., the Henry Hub) and access to storage. Many hubs have onsite storage capacity that permits parking or loaning of gas volumes for various durations of supply or market disruptions. In fact, many traditional and new storage developers .are advertising themselves as hubs, rather than just providers of storage.
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Hubs post rates for the services they perform; however, competition and the uncertainty of the value added by hub services have resulted in sharp discounting of these rates at most hubs. Many industry participants feel that the number of hubs and the services they offer will be reduced by competitive forces.
