Natural gas storage
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Template:EnergyPortal Natural gas, like many of the other commodities, can be stored for an indefinite period of time in natural gas storage facilities for later consumption.
Usage
Gas storage has been traditionally used to meet seasonal load variations. Gas is usually injected into storage from April through to October, and withdrawn from from November through to March. Now, it is also being used for a variety of other purposes, included but not limited to the following:
- Balance the flow in the pipeline systems. This is performed by mainline transmission pipeline companies to maintain operational integrity of the pipelines, by ensuring that the pipeline pressures are kept within design parameters.
- Maintain contractual balance. Shippers use stored gas to maintain the volume they deliver to the pipeline system and the volume they withdraw. Without access to such storage facilities, any imbalance situation would result in a hefty penalty.
- Level production over periods of fluctuating demand. Producers use storage to store any gas that is not immediately marketable, typically over the summer when demand is low and deliver it when in the winter months when the demand is high.
- Speculative tool. Producers and marketers use gas storage as a speculative tool, storing gas when they believe that prices will increase in the future and then selling it when it does reach those levels.
- Insurance against any unforeseen accidents. Gas storage can be used as an insurance that may affect either production or delivery of natural gas. These may include natural factors such as hurricanes, or malfunction is production or distribution systems.
- Meet regulatory obligations. Gas storage ensures to some extent the reliability of gas supply to the end consumer at the lowest cost, which is what the regulatory body is there to ensure. This is a reason why the regulatory body is constantly monitoring storage inventory levels across the board.
- Reduce price volatility. Gas storage ensures commodity liquidity at the market centers. This helps contain natural gas price volatility and uncertainty.
- Offset changes in natural gas demands. Gas storage facilities are gaining more importance due changes in natural gas demands. First, traditional supplies that were once relied upon to meet the winter peak demand are now unable to keep up. Second, there is a growing summer peak demand on natural gas, due to electric generation via gas fired power plants.
Measures and definitions
Characteristics of underground storage facilities need to be defined and measured. A number of volumetric measures have been put in place for that purpose:
- Total gas storage capacity: It is the maximum volume of natural gas that can be stored at the storage facility. It is determined by several physical factors such as the reservoir volume, and also on the operating procedures and engineering methods used.
- Total gas in storage: It is the total volume of gas in storage at the facility at a particular time.
- Base gas (also referred to as cushion gas): It is the volume of gas that is intended as permanent inventory in a storage reservoir to maintain adequate pressure and deliverability rates throughout the withdrawal season.
- Working gas capacity: It is the total gas storage capacity minus the base gas.
- Working gas: It is the total gas in storage minus the base gas. Working gas is the volume of gas available to the market place at a particular time.
- Physically unrecoverable gas: The amount of gas that is ore becomes permanently embedded in the formation of the storage facility and that can never be extracted back.
- Cycling rate: It is the average number of times a reservoir’s working gas volume can be turned over during a specific period of time. Typically the period of time used is one year.
- Deliverability: It is a measure of the amount of gas that can be delivered (withdrawn) from a storage facility on a daily basis. It is also referred to as the deliverability rate, withdrawal rate, or withdrawal capacity and is usually expressed in terms of millions of cubic feet of gas per day (MMcf/day) that can be delivered.
- Injection capacity (or rate): It is the amount of gas that can be injected into a storage facility on a daily basis. It can be thought of as the complement of the deliverability. Injection rate is also typically measured in millions of cubic feet of gas that can be delivered per day (MMcf/day).
The measurements above are not fixed for a given storage facility. For example, deliverability depends on several factors including the amount of gas in the reservoir and the pressure etc. Generally, a storage facility’s deliverability rate varies directly with the total amount of gas in the reservoir. It is at its highest when the reservoir is full and declines as gas is withdrawn. The injection capacity of a storage facility is also variable and depends on factors similar to those that affect deliverability. The injection rate varies inversely with the total amount of gas in storage. It is at its highest when the reservoir is nearly empty and declines as more gas is injected. The storage facility operator may also change operational parameters. This would allow, for example, the storage capacity maximum to be increased, the withdrawal of base gas during very high demand or reclassifying base gas to working gas if technological advances or engineering procedures allow.
Types
The most important type of gas storage is in underground reservoirs. There are three principal types: depleted gas reservoirs, aquifer reservoirs and salt cavern reservoirs. Each of these types possesses distinct physical characteristics and economical characteristics which govern the suitability of a particular type of storage type for a given application.
![](http://upload.wikimedia.org/wikipedia/commons/c/c7/UndergroundGasStorage_8.gif)
Depleted Gas Reservoir
These are the most prominent and common form of underground storage. They are the reservoir formations of natural gas fields that have produced all their economically recoverable gas. The depleted reservoir formation is readily capable of holding injected natural gas. Using such a facility is economically attractive because it allows the re-use, with suitable modification, of the extraction and distribution infrastructure remaining from the productive life of the gas field which reduces the start-up costs. Depleted reservoirs are also attractive because their geological and physical characteristics have already been studied by geologists and petroleum engineers and are usually well known. Consequently, depleted reservoirs are generally the cheapest and easiest to develop, operate, and maintain of the three types of underground storage.
In order to maintain working pressures in depleted reservoirs, about 50 percent of the natural gas in the formation must be kept as cushion gas. However, since depleted reservoirs were previously been filled with natural gas and hydrocarbons, they do not require the injection of gas that will become physically unrecoverable as this is already present in the formation. This provides a further economic boost for this type of facility, particularly when the cost of gas is high. Typically, these facilities are operated on a single annual cycle; gas is injected during the off-peak summer months and withdrawn during the winter months of peak demand.
A number of factors determine whether or not a depleted gas field will make an economically viable storage facility. Geographically, depleted reservoirs should be relatively close to gas markets and to transportation infrastructure (pipelines and distribution systems) which will connect them to that market. Since the fields were at one time productive and connected to infrastructure distance from market is the dominant geographical factor. Geologically, it is preferred that depleted reservoir formations have high porosity and permeability. The porosity of the formation is one of the factors that determines the amount of natural gas the reservoir is able to hold. Permeability is a measure of the rate at which natural gas flows through the formation and ultimately determines the rate of injection and withdrawal of gas from storage.
Aquifer Reservoir
Aquifers are underground porous, permeable rock formations that act as natural water reservoirs. These water containing formations may be reconditioned, in some cases, and used as natural gas storage facilities. Traditionally, these facilities are operated with a single winter withdrawal period as with depleted reservoirs. Aquifers are the least desirable and most expensive type of natural gas storage facility for a number of reasons. First the geological characteristics of aquifer formation are not known ahead of time, as with depleted reservoirs. Therefore, a significant investment has to go into discovering the geological characteristics of an aquifer, and determining its suitability as a natural gas storage facility. If the site is deemed suitable, all of the associated infrastructure must also be developed. This includes installation of wells, extraction equipment, pipelines, dehydration facilities, and possibly compression equipment. This in turn adds to the development cost. In addition to these considerations, aquifer formations typically require a great deal more cushion gas than do depleted reservoirs. Since the formation initially contained water, there is no naturally occurring gas in the formation to begin with. This requires a certain amount of natural gas to be initially injected into the formation. This gas will ultimately prove physically unrecoverable. In aquifers formations, cushion gas requirements can be as high as 80 percent of the total gas volume. Most aquifer storage facilities were developed when the price of natural gas was low, meaning this cushion gas was not very expensive to give up. However, with gas prices on the rise aquifer formations are increasingly expensive to develop. All these factors mean that developing an aquifer reservoir as a storage facility can be time consuming and expensive.
Salt Formation
Underground salt formations are the third type of natural gas storage. These formations are well suited to natural gas storage in that salt caverns, once formed, allow little injected natural gas to escape the formation unless specifically extracted. The walls of a salt cavern are strong, which makes it very resilient against degradation over the lifespan of the storage facility. Once a suitable site is discovered, and deemed suitable for natural gas storage application, it is necessary to develop a salt cavern within the formation. This process consists of washing away a certain amount of salt from the deposit, leaving a large empty space in the formation. This is done by drilling a well down into the formation, and cycling large amounts of water through the completed well. This water will then dissolve some of the salt in the deposit, and can be cycled back up the well, leaving a large empty space that the salt used to occupy. This space can then be filled with natural gas. This engineering process is known as salt cavern leaching. Although the process described can be quite expensive, once created, a salt cavern offers an underground natural gas storage vessel with very high deliverability. In addition, cushion gas requirements are the lowest of all three storage types. Salt caverns only requiring about 33 percent of total gas capacity to be used as cushion gas. This type of storage facility is typically much smaller than depleted gas reservoirs and aquifers, in fact underground salt caverns (only one one-hundredth of the area taken up by a depleted gas reservoir). Therefore salt caverns cannot hold the volume of gas necessary to meet base load storage requirements. However, deliverability from salt caverns is typically much higher than for either aquifers or depleted reservoirs. Therefore natural gas stored in a salt cavern may be more readily (and quickly) withdrawn, and caverns may be replenished with natural gas more quickly than in either of the other types of storage facilities. This quick turnover is particularly useful in emergency situations or during unexpected short term demand surges. From an economical point of view, although construction is more costly than depleted field conversions measured on the basis of dollars per thousand cubic feet of working gas, its ability to perform several withdrawal and injection cycles each year reduces the per-unit cost of each thousand cubic feet of gas injected and withdrawn.
Type | Cushion Gas | Injection Period (Days) | Withdrawal Period (Days) |
---|---|---|---|
Depleted Reservoir | 50% | 200-250 | 100-150 |
Aquifer Reservoir | 50%-80% | 200-250 | 100-150 |
Salt Formation | 20%-30% | 20-40 | 10-20 |
Other
There are also other types of storage such as:
LNG
LNG facilities provide peak deliveries during periods when demand exceeds pipelines deliveries. LNG possesses a number of advantages over underground storage. First of all as a liquid, it occupies about 600 times less space than gas stored underground. Second, it provides high deliverability on a very short notice. This is because LNG storage facilities are generally located directly in the market area and can be trucked to the customers as well, thus bypassing pipeline demand charges. Third, there is no requirement for cushion gas. Last but not least, it allows access to supply outside North America. On the downside, LNG facilities are more expensive to build and maintain than developing new underground storage facilities.
Pipeline Capacity
Gas can be temporarily stored in the pipeline system itself, through a process called line packing. This is done by packing more gas into the pipeline via an increase in the pressure. During periods of high demand, greater quantities of gas can be withdrawn from the pipeline in the market area, than is injected at the production area. The process of line packing is usually performed during off peak times to meet the next-day’s peaking demands. This method, however, only provides a temporary short-term substitute for traditional underground storage.
Owners
Interstate Pipeline Companies
Interstate pipeline companies rely heavily on underground storage to perform load balancing and system supply management on their long-haul transmission lines. FERC regulations though demand that these companies open up the remainder of their capacity not used for that purpose to third parties. Twenty-five interstate companies currently operate 172 underground natural gas storage facilities. In 2005, their facilities accounted for about 43 percent of overall storage deliverability and 55 percent of working gas capacity in the US[3]. These operators include the Columbia Gas Transmission Company, Dominion Gas Transmission Company, The National Fuel Gas Supply Company, Natural Gas Pipeline of America, Texas Gas Transmission Company, Southern Star Central Pipeline Company, TransCanada Corporation.
Intrastate Pipeline Companies and Local Distribution Companies
Intrastate pipeline companies use storage facilities for operational balancing and system supply as well as to meet the energy demand of end-use customers. LDCs generally use gas from storage to sever customers directly. This group operates 148 underground storage sites and account for 40 percent of overall storage deliverability and 32 percent of working gas capacity in the US[3]. These operators include Consumers Energy Company and the Northern Illinois Gas Company (NICOR), in the US and Enbridge and Union Gas in Canada.
Independent Storage Service Providers
The deregulation activity in the underground gas storage arena has attracted independent storage service providers to develop storage facilities. The capacity made available would then be leased to third-party customers such as marketers and electricity generators. It is expected that in the future, this group would take more market share, as more deregulation takes place. Currently in the US, this group accounts for 18 percent of overall storage deliverability and 13 percent of working gas capacity in the US[3].
Type of Owner | Number of Sites | Working Gas Capacity (Bcf) | Daily Deliverability (MMcf) |
---|---|---|---|
Interstate Pipeline | 172 | 2,197 | 35,830 |
Intrastate & LDC | 148 | 1,292 | 33,121 |
Independent | 74 | 521 | 14,681 |
Location and Distribution
US
The US is typically broken out into three main regions when it comes to gas consumption and production. These are the consuming East, the consuming West and the producing South.
![](http://upload.wikimedia.org/wikipedia/commons/c/cc/NaturalGasStorage_5.gif)
Consuming East
The consuming east region, particularly the states in the northern part, heavily rely on stored gas to meet the peak demand during the cold winter months. Due to the prevailing cold winters, large population centers and developed infrastructure, it is not surprising that this region has the highest level of working gas storage capacity of the other regions and the largest number of storage sites, mainly in depleted reservoirs. In addition to underground storage, LNG is increasingly playing a crucial role in providing supplemental backup and/or peaking supply to LDCs on a short term basis. Although the total capacity for these LNG facilities does not match those of underground storage in scale, the short term high deliverability makes up for that.
Consuming West
The consuming west region has the smallest share of gas storage both in terms of the number of sites as well as gas capacity/deliverability. Storage in this area is mostly used to allow domestic and Canadian gas, coming from Alberta, to flow at a rather constant rate.
Producing South
The producing south's storage facilities are linked to the market centers and play a crucial role in the efficient export, transmission and distribution of natural gas produced to the consuming regions. These storage facilities allow the storage of gas that is not immediately marketable to be stored for later use.
Region | Number of Sites | Working Gas Capacity (Bcf) | Daily Deliverability (MMcf) |
---|---|---|---|
East | 280 | 2,045 | 39,643 |
West | 37 | 628 | 9,795 |
South | 98 | 1,226 | 28,296 |
Canada
In Canada, the total working gas capacity was approximated to be 456 Bcf in 2006[7]. Alberta storage accounts for 47.5 percent of the total working gas volume. It is followed by Ontario which accounts for 39.1 percent, British Columbia which accounts for 7.6 percent, Saskatchewan which accounts for 5.1 percent and finally Quebec which accounts for 0.9 percent[8].
Regulation and Deregulation
US
Interstate pipeline companies in the US are subject to the jurisdiction of FERC. Prior to 1994, these companies owned all the gas that flowed through their systems. This also included gas in their storage facility, over which they had complete control. Then FERC Order 636 was implemented. This required the companies to operate their facilities, including gas storage on an open access basis. For gas storage, this meant that these companies could only reserve the capacity needed to maintain system integrity. The rest of the capacity would be available for leasing to third parties on a nondiscriminatory basis. Open access has opened a wide variety of application for gas storage, particularly for marketers which can now exploit price arbitrage opportunities. Any storage capacity would be priced at cost-based pricing, unless the provider can demonstrate to FERC that it lacks market power, in which case it may be allowed to price at market-based rates to gain market share. FERC defines market power as "..the ability of a seller profitably to maintain prices above competitive levels for a significant period of time.". The underlying pricing structure for storage has discouraged development in the gas storage sector, which has not seen many new storage facilities constructed, besides current ones being expanded. In 2005, FERC announced a new Order 678 targeted particularly to gas storage. This rule is intended to stimulate the development of new gas storage facility in the ultimate goal of reducing natural gas price volatility. Commission Chairman Joseph T. Kelliher observed: “Since 1988, natural gas demand in the United States has risen 24 percent. Over the same period, gas storage capacity has increased only 1.4 percent. While construction of storage capacity has lagged behind the demand for natural gas, we have seen record levels of price volatility. This suggests that current storage capacity is inadequate. Further, this year, what storage capacity exists may be full far earlier than in any previous year. According to some analysts, that raises the prospect that some domestic gas production may be shut-in. Our final rule should help reduce price volatility and expand storage capacity.” This ruling aims at opening up two approaches for developers of natural gas storage, to be able to charge market-based rates. The first one is the redefinition of the relevant product market for storage that includes alternatives for storage such as available pipeline capacity, local gas production and LNG terminals. The second approach aims at implementing section 312 of the Energy Policy Act. It would allow an applicant to request authority to charge “market-based rates even if a lack of market power has not been demonstrated, in circumstances where market-based rates are in the public interest and necessary to encourage the construction of storage capacity in the area needing storage service and that customers are adequately protected,” the Commission said. It is expected that this new order will entice developers, especially independent storage operators, to develop new facilities in the near future.
Canada
In Alberta, gas storage rates are not regulated and providers negotiate rates with their customers on a contract-by-contract basis. However the Carbon facility which is owned by ATCO gas is regulated, since ATCO is a utility company. Therefore ATCO Gas has to charge cost-based rates for its customers, and can market any additional capacities at market-based rates. In Ontario, gas storage is regulated by the Ontario Energy Board. Currently all the available storage is owned by vertically integrated utilities. The utility companies have to price their storage capacity sold to their customers at cost-based rates, but can market any remaining capacity at market-based rates. Storage developed by independent storage developers can charge market-based rates. In British Columbia, gas storage is not regulated. All available storage capacity is marketed at market-based rates.
Storage Economics
Storage Development Cost
As with all infrastructural investments in the energy sector, developing storage facilities is capital intensive. Investors usually use the return on investment as a financial measure for the viability of such projects. It has been estimated that investors require a rate or return between 12 percent to 15 percent for regulated projects, and close to 20 percent for unregulated projects[4]. The higher expected return from unregulated projects is due to the higher perceived market risk. In addition significant expenses are accumulated during the planning and location of potential storage sites to determine its suitability, which further increases the risk.
The capital expenditure to build the facility mostly depends on the physical characteristics of the reservoir. First of all, the development cost of a storage facility largely depends on the type of the storage field. As a general rule of thumb, salt caverns are the most expensive to develop on a Bcf of Working Gas Capacity Basis. However one should keep in mind that because the gas in such facilities can be cycled repeatedly, on a Deliverability basis, they may be less costly. A Salt Cavern facility might cost anywhere from $10 million to $25 million/Bcf of working gas capacity[4]. The wide price range is because of region difference which dictates the geological requirements. These factors include the amount of compressive horsepower required, the type of surface and the quality of the geologic structure to name a few. A depleted reservoir costs between $5 million to $6 million/Bcf of Working Gas Capacity[4]. Finally another major cost incurred when building new storage facilities is that of base gas.
The amount of base gas in a reservoir could be as high as 80% for aquifers making them very unattractive to develop when gas prices are high. On the other hand salt caverns require the least amount of base gas. The high cost of base gas is what drives the expansion of current sites vs the development of new ones. This is due to the fact that expansions require little addition to base gas.
The expected cash flows from such projects depend on a number of factors. These include the services the facility provides as well as the regulatory regime under which it operates. Facilities that operate primarily to take advantage of commodity arbitrage opportunities are expected to have different cash flow benefits than ones primarily used to ensure seasonal supply reliability. Rules set by regulators can on one hand restrict the profit made by storage facility owners or on the other hand guarantee profit, depending on the market model.
Storage Valuation
To understand the economics of gas storage, it is crucial to be able to value it. Several approaches have been proposed. They include [4]:
- Cost of Service Valuation
- Least Cost Planning
- Seasonal Valuation
- Option-Based Valuation
The different valuation modes co-exist in the real world and are not mutually exclusive. Buyers and sellers typically use a combination of the different prices to come up with the true value of storage. An example of the different valuations and the price they generate can be found in the table below.
Type | Dollars/Mcf of Working Gas |
---|---|
Median Cost-of-Service | $0.64 |
Intrinsic Value for Winter 05/06 as of August 2004 | $0.47-$0.62 |
Least Cost Planning (Depleted Reservoir) | $0.70-$1.10 |
Hypothetical Cost of Service of Salt Cavern | $2.93 |
Intrinsic and Extrinsic Value of Salt Cavern (Depleted Reservoir) | $1.60-$1.90 |
Cost of Service Valuation
This valuation mode is typically used to value regulated storage [4], for instance storage operated by interstate pipeline companies. These companies are regulated by FERC. This pricing method allows the developers to recover their cost and an agreed upon return on investment. The regulatory body requires that the rates and tariffs are maintained and publicly published. The services provided by these companies include firm and interruptible storage as well as no-notice storage services. Usually, cost of service pricing is used for depleted reservoir facilities. If it is used to price, say salt cavern formations, the cost would be very high, due to the high cost of development of such facilities.
Least Cost Planning
This valuation mode is typically used by local distribution companies (LDCs)[4].It is based on pricing storage, according to the savings resulting from not having to resort to other more expensive options. This pricing mode depends on the consumer and their respective load profile/shape.
Seasonal Valuation
The seasonal valuation of storage is also referred to as the intrinsic value. It is evaluated as the difference between the two prices in a pair of forward prices. The idea being that one can lock-in a forward spread, either physically or financially. For developers seeking to study the feasibility of building a storage facility, they would typically look at the long-term price spreads.
Option-Based Valuation
In addition to possessing an intrinsic value, storage may also have extrinsic value. Intrinsic valuation of storage does not take the cycling ability of high-deliverability storage. The extrinsic valuation reflects the fact that in such facilities, say salt cavern formations, a proportion of the space can be used more than once, thus increasing value. Such high-deliverability storage facility allows its user to respond to variations in demand/price within a season or during a given day rather than just seasonal variations as was the case with single cycle facilities.
Effects of Natural Gas Prices on Storage
In general as we see in the graph below, high gas prices are typically associated to low storage periods. Usually when prices are high during the early months of the refill season (April-October), many users of storage adopt a wait and see attitude. They limit their gas intake in anticipation that the prices will drop before the heating season begins (November-March). However when that decrease does not occur, they are forced to buy natural gas at high prices. This is particularly true for Local Distribution and other operators who rely on storage to meet the seasonal demand for their customers. On the other hand, other storage users, who use storage for as a marketing tool (hedging or speculating) will hold off storing a lot of gas when the prices are high.
Future of Storage Technology
Research is being conducted on many fronts in the gas storage field to help identify new improved and more economical ways to store gas. Research being conducted by the US Energy department is showing that salt formations can be chilled allowing for more gas to be stored [2]. This will reduce the size of the formation needed to be treated, and have salt extracted from it. This will lead to cheaper development costs for salt formation storage facility type. Another aspect being looked at, are other formations that may hold gas. These include hard rock formations such as granite, in areas where such formations exists and other types currently used for gas storage do not [2]. In Sweden a new type of storage facility has been built, called "lined rock cavern" [2]. This storage facility consists of installing a steel tank in a cavern in the rock of a hill and surrounding it with concrete. Although the development cost of such facility is quite expensive, its ability to cycle gas multiple times compensates for it, similar to salt formation facilities. Finally, another research projected sponsored by the Department of Energy, is that of hydrates. Hydrates are compounds formed when natural gas is frozen in the presence of water. The advantage being that as much as 181 standard cubic feet of natural gas could be stored in a single cubic foot of hydrate [2].
See also
- Natural gas
- Natural gas prices
- Natural gas processing
- Carbon dioxide (CO2)
- Compressed natural gas (CNG)
- Fuel station
- Future energy development
- Hydrogen vehicle
- Liquefied natural gas (LNG)
- List of North American natural gas pipelines
- Steam reforming
- World energy resources and consumption
External links
- EIA - Energy Information Administration - Topics for Natural Gas Storage
- FERC - Federal Energy Regulatory Commission - Natural Gas Storage
References
- ^ a b stor top.asp EIA-Topics for Natural Gas Storage
- ^ a b c d e U.S. Department of Energy-Transmission, Distribution & Storage
- ^ a b c d e f gas/natural gas/feature articles/2006/ngstorage/ngstorage.pdfU.S. Underground Natural Gas Storage Developments: 1998-2005 Cite error: The named reference "Source1" was defined multiple times with different content (see the help page).
- ^ a b c d e f g h i Current State of and Issues Concerning Underground Natural Gas Storage
- ^ gas/natural gas/analysis publications/storagebasics/storagebasics.htmlEIA-The Basics of Underground Natural Gas Storage
- ^ Natural Gas Storage in the United States in 2001: A Current Assessment and Near-Term Outlook
- ^ Canadian Gas Association-Natural Gas Storage, monthly data
- ^ Economic Regulation of Natural Gas Storage in Ontario
- ^ MNR-Underground Storage Resources
- ^ Government of Alberta-Maps of Natural Gas in Alberta
- ^ Review and Outlook English206PFM-02022007-2605.pdf Natural Resources Canada-Canadian Natural Gas-Review of 2005 & Outlook to 2020