Natural gas is a versatile and vital energy source, used for various applications including cooking, heating, electricity generation, and as a raw material for products like fertilizer and plastics. With its increasing importance in the energy landscape, the need for efficient natural gas storage has become paramount. Not only does storage enable supply to match demand during seasonal variations, but it also plays a crucial role in meeting hourly variability in demand. This article explores the different aspects of natural gas storage, including its benefits, types, valuation, and market conditions.
The Benefits of Natural Gas Storage
Ensuring Reliable and Responsive Delivery
One of the key advantages of natural gas storage is its ability to ensure reliable and responsive delivery. Natural gas consumption experiences significant seasonal variations, with higher demand during the winter and lower demand in mild-weather months. Storage facilities allow for excess natural gas production during low-demand periods to be stored and withdrawn during high-demand periods, effectively balancing supply and demand. This flexibility and resilience provided by storage is crucial in maintaining a reliable and responsive natural gas delivery system.
In addition to its role in meeting energy demand, natural gas storage also brings environmental benefits. The increased use of natural gas in power generation has led to significant reductions in air emissions, including sulfur dioxide (SO2), nitrogen oxides (NOX), and carbon dioxide (CO2). Researchers have found that the increased use of natural gas in power generation has resulted in a 40% reduction in NOX emissions and a 44% reduction in SO2 emissions since 1997. Furthermore, greater use of natural gas has helped reduce U.S. electricity-related CO2 emissions by 9% in 2014 compared to 2005 levels.
How Does Natural Gas Storage Work?
Natural gas storage operates on the principle of injecting gas into storage during periods of low demand and withdrawing gas from storage during periods of high demand. There are three principal types of underground storage sites used in the United States: depleted natural gas or oil fields, aquifers, and salt formations. (shameless plug: Rogue Edge Members have access to an interactive map with details on size and location of storage fields within the US)
Depleted fields, which account for approximately 80% of underground storage facilities, are former natural gas or oil fields that have already produced most of their economically recoverable reserves. These fields offer the advantage of utilizing existing wells, gathering systems, and pipeline connections, reducing start-up costs. However, they require a certain level of natural gas to be kept as cushion gas to maintain adequate pressure and deliverability rates throughout the withdrawal season.
Salt formations make up about 10% of underground storage facilities. These formations provide high injection and withdrawal rates, allowing for quick and efficient storage operations. Salt cavern storage facilities can be filled up and emptied over a period of days, enabling multiple cycles of gas injection and withdrawal within a single season.
Depleted aquifers, accounting for approximately 10% of storage facilities, are underground water-bearing rock formations overlaid with an impermeable cap rock. These formations require more cushion gas compared to depleted fields but offer the advantage of longer storage duration, making them suitable for meeting extended periods of high demand.
Valuing Natural Gas Storage
Valuing natural gas storage involves considering various factors, including intrinsic value, extrinsic value, market conditions, storage service level, and market access. (shameless plug: our team builds storage models, processing models, and pricing models to help provide a foundation into optimizing values.)
The intrinsic value of storage is calculated by determining the price differential between the cost of gas injection and withdrawal, taking into account any carrying cost of capital. The seasonal discount between the lower-priced injection season and the higher-priced withdrawal season contributes to the intrinsic storage value. For example, assuming a consistent fill during the summer and withdrawal during the winter, a summer/winter spread of $0.31/MMBtu can be used as a starting point for intrinsic storage value. (shameless plug: Rogue Edge Members get a daily email with the 3-5 year price curve showing the potential opportunities)
Extrinsic value takes into account factors beyond the intrinsic value, such as the type of storage facility, market conditions, and the capability of storage to reach specific markets. Extrinsic value can be extreme hyper volatility of Power or Natural Gas Prices – understanding why and when is important to storage injection/withdrawal decisions. Different types of storage, such as salt cavern storage and depleted well storage, offer unique advantages and limitations. For instance, salt cavern storage allows for high-volume injection and quick withdrawal, enabling storage owners to take advantage of short-term pricing opportunities. On the other hand, depleted well storage provides access to storage over a longer stretch of cold weather.
Market conditions, particularly related to regional demand and supply dynamics, significantly impact the valuation of storage. The market’s perception of sufficient inventory in storage to meet winter demand and the ability to fill storage each summer prior to winter play a crucial role in determining storage value. Additionally, abnormal weather patterns and the introduction of new pipeline infrastructure can also affect storage value. (shameless plug: Rogue Edge Members receive weekly insight into energy fundamentals from our team of experts weighing in on potential pricing events)
Storage Service Level
The service level of storage, whether it is firm or interruptible, also affects its value. Firm storage, which guarantees availability during peak demand periods, generally commands higher costs compared to interruptible storage, which is only available during periods of less demand. (shameless plug: Rogue Edge Members have access to interactive charts for storage levels for the US, East, South, Midwest, Mountain, and Pacific – detailing injection for the week, 5 year range, and an interactive chart with years and years of history for each week )
The ability to deliver stored gas into highly priced and volatile markets during peak demand periods adds extrinsic value to storage. The location of storage facilities and their proximity to regions with historical price volatility influence their market access and value.
Storage Space vs. Injection/Withdrawal Rights
The availability of physical storage space and the daily injection/withdrawal limits also contribute to the economics and value of storage. The combination of space and injection/withdrawal rights determines the flexibility and usability of storage, depending on an entity’s specific needs and risk aversion.
Natural gas storage plays a critical role in the energy landscape, ensuring reliable and responsive delivery while offering environmental benefits. Valuing storage involves considering intrinsic and extrinsic factors, market conditions, storage service level, market access, and space and injection/withdrawal rights. As the demand for natural gas continues to grow, the need for efficient and strategic storage facilities becomes increasingly important in meeting both seasonal and hourly variability in demand. By understanding the value and benefits of natural gas storage, energy stakeholders can make informed decisions to optimize their energy supply and mitigate risk in a dynamic market environment.
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Additional Information: Natural gas storage is not only needed for seasonal variability in demand but also for meeting the growing need to provide hourly variability in demand, ensuring a reliable and flexible energy supply.