Background, Issues, and Trends in Underground Hydrocarbon Storage

David E. Dismukes

Center for Energy StudiesLouisiana State University

Environmental Permitting ClassJanuary 29, 2009

Description of the Natural Gasand Natural Gas Liquids Business

The Natural Gas Industry

Natural GasWells

Gas ProcessingPlant

Natural GasCompany

Main Line Sales

Production Transmission Distribution

Consumers

Source: Energy Information Administration, Department of Energy

UndergroundStorage

Hydrocarbon Storage Basics

Key Storage Characteristics& Terms

Characteristic Description

CapacityUsually though of in terms of base, working and total. (Denominated in Bcf)

Deliverability Speed of withdraw and injection.

Cycles Number of complete “turns” a facility can take.

All of these characteristics are a critical components in valuing storage assets.

5

Storage Basics

Why do we store hydrocarbons?

(1) Reliability: hedge on quantity (outages/curtailments).(2) Risk management: hedge on price (volatility).(3) Profitability: speculation (profits on market changes).

Generally, the more uncertainty and volatility (price) a commodity, the greater the need for storage

6

Natural Gas Storage Cycles

Source: Energy Information Administration, Department of Energy.

Bcf

Storage is needed to meet those peak usage periods when natural gas

demand exceeds natural gas supply.

Fundamental purpose of storage is to provide gas during peak periods (i.e., reliability).

Attractive Storage Physical Characteristics

Storage Characteristics Function / Nature

OptionalityLocation of facility will define the number of potential buyers/sellers given their location and connecting infrastructure

DeliverabilityType of facility tells you how quickly you can move the commodity to take advantage, or hedge, against market uncertainties

Interconnectibility Location to important infrastructure defines market scope / access

All of these characteristics are a critical part of storage value chain8

The Gulf of Mexico region accounts for:

• Approximately 30 percent of total U.S. crude oil production;

• Roughly 20 percent of total U.S. natural gas production;

• Almost 15 percent of total U.S. natural gas liquids production;

• 60 percent of U.S. crude oil imports;

• Over 20 percent of U.S. natural gas (non-pipeline) imports;

• 50 percent of U.S. natural gas liquids imports; and

• 43 percent of the Strategic Petroleum Reserve (“SPR”) storage capacity; and

• Over 45 percent of total U.S. petroleum refining capacity and 62 percent of the capacity east of the Rockies.

The Gulf of Mexico region is the most integrated and comprehensive energy economy in the world

Optionality

9

Storage Quick Facts

10Note: Gulf Coast states include Louisiana, Texas, Mississippi and AlabamaSource: Energy Information Administration, US Department of Energy.

• Natural gas can be stored for an indefinite period of time. The exploration, production, and transportation of natural gas takes time, and the natural gas that reaches its destination is not always needed right away, so it is injected into underground storage facilities.

• There are 57 active underground storage facilities in the Gulf Coast region, representing 14 percent of the nation’s underground storage facilities.

• In 2005, the Gulf Coast region had 1.4 Tcf of natural gas storage capacity. This represents approximately 17 percent of the nation’s underground storage capacity.

Duke Energy Gas Transmission Canada

pse.com

Different types of storage influence different deliverability attributes

Deliverability

Salt Caverns

• Very high withdrawal and injection rates. • Base gas requirements are relatively low. • Most salt caverns/domes in US along GOM. • More expensive, but faster and more flexible.

Depleted Reservoirs

Aquifers

• Most common - - has slower injection/withdrawal rates.• Conversion of a field from production to storage duty takes

advantage of existing wells, gathering systems, and pipeline connections.

• Usually used only in areas where there are no nearby depleted reservoirs.

• Single withdraw period (winter) & used to meet peak load requirements as well.

• Least desirable and most expensive type of natural gas storage facility.

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Storage Types and Statistics

Market Pad GasInjection Rate

(Days)Withdraw Rate

(Days) CyclesStorage Type Share Share High Low High Low High Low

Depleted Reservoir 0.86 50% to 80% 200 250 100 150 1.22 0.91

Aquifer 0.1 50 200 250 100 150 1.22 0.91

Salt Cavern 0.04 20% -30 % 20 40 10 20 12.17 6.08

Salt Cavern Basics

What Does A Salt Dome Look Like?

14

How is a Salt Dome Mined for Storage?

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DeliverabilityExisting Salt Domes

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Other Types of Louisiana Underground Storage

Source: Energy Information Administration, U.S. Department of Energy; Federal Energy Regulatory Commission; and PennWell MAPSearch Database.

Pressures Changing Cost and Value for Hydrocarbon Storage

Factors Changing Hydrocarbon Storage Development

What are the factors increasing costs and value?

19

(1) Continued natural gas price volatility – seasonal differentials.

(2) Growth in natural gas usage, particularly power generation.

(3) Basis differentials/regional supply corrections (changing pipe and production configurations)

(4) Increasing LNG imports requires capacity development

Pricing Considerations

Daily Henry Hub Prices(1998-Present)

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20Ja

n-98

Jul-9

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Jan-

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Jul-9

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Jan-

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Jul-0

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($/M

cf)

Source: Intercontinental Exchange

5-year average through 2000: $2.89(standard deviation: 1.46)

average for periodsince 2000-2001

heating season: $5.4(standard deviation: 2.25)

21

Continued natural gas price volatility for near term.

Henry Hub – Houston Ship Channel Spread

-$2

-$1

$0

$1

$2

$3

$4M

ay-0

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Sep

-02

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May

-03

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-03

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-07

($/M

cf)

22

Basis differentials can be serious issue during market interruptions.

Post Katrina/RitaSupply disruptions

Intrinsic and Extrinsic Value inNatural Gas Storage

• The seasonal valuation of storage. • Evaluated as the difference between the

two prices in a pair of forward prices. • Value secured by locking-in a forward

spread, either physically or financially.

• Determined by the ability to profit by the volatility and uncertainty of prices.

Intrinsic Value:

Extrinsic Value:

Difference between Intrinsic and ExtrinsicValue of Natural Gas Storage

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03

January 2004contract

July 2003contract

The intrinsic value of storage is the difference between the cost of July 2003 gas (here at

contract expiration) and the value of January 2004 gas sold the same day.

The cost of July gas in storage is fixed after contract expiration

Opportunity for additional value on July-January spread

Source: Federal Energy Regulatory Commission and NYMEX.

$/M

MB

tu

Power Generation Considerations

Daily Entergy Spot Prices(2001-Present)

26

Power generation prices volatile – natural gas driven – cyclical load.

Power Generation Impacts

27

(1)Since the late 1990s, over 225,000 MWs of gas-fired capacity has come on line.

(2)While construction costs have escalated, still relatively attractive to other baseload options.

(3)Gas is important transition (?) fuel for carbon policy.

No new coal plants is becoming the norm in most states.Nuclear takes too long and costs too much – too much

uncertainty.Carbon sequestration (stack) expensive and inefficient.

(4)Renewables are in kW not in MW – scale issue and regional limitations.

(5)Large scale hydroelectric facilities very limited and unlikely.

LNG Considerations

Corpus Christi, TX

Lake Charles, LA

Port Pelican (13)

Freeport, TX

Golden Pass

Port Lavaca, TX

Port Arthur

Sabine Pass, LA

Main PassMcMoran

Hackberry

Bienville

Pascagoula, MS

Cameron

Gulf GatewayVista Del Sol

Ingleside LNG

Existing Terminal

Approved Terminal

Proposed Terminal

Potential Terminal

Gulf Coast LNG Terminals

29

0

5

10

15

20

25

30

35

40

45

2007 2008 2009 2010 2011

Proposed

Current

Note: New capacity includes terminals that have been approved, or are pending approval.

Planned LNG Capacity Additionsand Expansions (2007-2010)

Source: FERC and various tradepress and company websites

Cap

acity

(Bcf

/d)

30

Most LNG regasification capacity on line within the next 5 years.

Constructed Regasification Facilities

LNG Supply Curve

Source: ICF Consulting

Production & Transportation Considerations

Unconventional Gas Production

Energy Information Administration.

Bcf

Unconventional Gas Production

Source: ICF Consulting.

Cost Considerations

Recent Acquisition Costs

Source: ICF Consulting.

Reported Development Costs

Source: ICF Consulting.

Conclusions & Outlook

FERC Certification &Reclassifications

0

2

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Certifications

Reclassifications

Source: Federal Energy Regulatory Commission.

Source: ICF Consulting.

Forecasted Storage Capacity Growth

Source: ICF Consulting.

Forecasted Storage Capacity Growth

Source: ICF Consulting.

Forecasted Production AreaStorage Capacity Growth

Louisiana Development Issues

44

(1) Changing production opportunities (Haynesville) will have big impact on facility location.

(2) Salt cavern availability.

(3) Cost escalation issues.

(4) Water use issues.

(5) Regulatory and tax issues.

(6) State lands development.

(7) Resource competition for other forms of underground storage (NGLs, crudes, product, CO2)

Questions, Comments, & Discussion

dismukes@lsu.edu

www.enrg.lsu.edu

mailto:dismukes@lsu.eduhttp://www.enrg.lsu.edu/

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