Capstone Energy Services


A Critical Look at Natural Gas Storage

March 3rd, 2014

OMAHA (Capstone Energy Services) – One of the driving forces in the chaotic natural gas market this winter has been the rapidly depleting storage caused by the relentless cold weather in the Midwest and the East. At the beginning of the withdrawal season in November, inventories exceeded 3,800 Bcf, 80 Bcf below the previous year, but on par with the previous 3 years before that. Analysts were convinced that the high inventory levels were more than sufficient to supply a much colder than normal winter. This winter is challenging that confidence. As of Friday February 20th, the Energy Information Administration estimates inventories to be 1,348 Bcf, well below the five year low of 1,737 Bcf and the lowest since 2002/2003 winter. Analyst projections for April 1st range from 1,000 to 1,200 Bcf. Starting with the current balance of 1,348, if the withdrawal from now until April 1st is the same as last year (cold March) the April 1 balance will be 792 Bcf. If the withdrawal approximates the five year average or the 15 year average, the balance will be 1,166 Bcf or 1,037 respectively. With the first two weeks of March now predicted to be colder than normal in the eastern two-thirds of the country, a good chance exists that the April 1 balance will be below 1,000 Bcf.

With the sharp decline in storage this year, one would expect the NYMEX forward curve to begin reflecting the value that winter storage availability has as a supplemental source of supply. Natural gas daily cash prices this winter have been trading at $10, $20, $30 or more depending on the market area. Yet, the average NYMEX price for next winter (Nov14-Mar15), at $4.63 per MMBtu, is only about $0.10 per MMBtu higher than Apr14-Oct14. This price differential is not nearly enough to cover the storage inventory cost and to hedge against market losses. As a result, there currently exists no financial incentive to use, operate or invest in merchant storage fields.

In reviewing the locations and capacity of natural gas storage in the U.S., it is interesting to note that 23% of U.S. storage capacity exists in the same geographic region as the already pipeline constrained Marcellus and Utica Shale production areas: upstate NY, Western PA, Eastern OH and WV. (See maps and Table below) 32% of the storage is in the traditional producing areas of the Gulf Coast region, with no storage capability to speak of on the East Coast from Florida to Maine. It, therefore, appears that one contributing factor in this winter’s extreme price volatility has been insufficient delivery capacity into high demand areas. Nevertheless, storage is being withdrawn at reasonable rates relative to the severity of the winter, suggesting the problem is deliverability of available production not deliverability of storage.

This winter is bringing the lessons of a natural gas industry in transition, where the production balance is geographically shifting while the available capacity infrastructure struggles to keep up. At the same time, increasing demand from industrial expansions, electric generation and proposed export facilities is requiring a complete redesign of the flow patterns within the U.S. pipeline infrastructure. In this transition, it will be important for FERC and the natural gas industry to protect the native seasonal demand requirements and maintain the required storage and delivery infrastructure to meet those requirements, particularly during a much colder than normal winter, such as this one. While a winter like this may not occur often. it has happened before and it will happen again. It is probably a good idea to begin to rethink annual supply and risk management strategies in light of this winter and the changing natural gas industry. Future price volatility is a risk that should be taken into consideration, particularly at this point in time, because the transition in the natural gas industry is just in the beginning stages of a decade long process.


By Ed Freeman

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