Sample News Story
Gas Storage Comes Under Cedigaz Scrutiny
28/03/1997
If anything demonstrates that gas is not yet a boringly mature market, it must be storage. Different countries have radically different amounts of storage compared to their market size, and although it is possible to justify some of these differences it is hard to explain why they are so large. In fact, the scale of the differences prompts suspicion that not everyone is following the most efficient commercial policy.
No surprise In an industry dominated by monopolistic practices, this is not entirely surprising; it would be interesting to see what competitive pressures would do to the provision of storage. It is no coincidence that some of the most interesting things are being done in the United States, where there is indeed competition in storage. But even in the US, the situation appears still to be evolving. The end of the gas bubble is starting to change the rules.
Sylvie’s swansong These thoughts are prompted by the publication of "Underground Gas Storage in the World – A New Era of Expansion"*, which is Sylvie Cornot-Gandolphe’s swansong from Cedigaz and as comprehensive a review of the subject as one could hope for. Here, one can find details of every underground gas storage facility in the world, and although the title says underground storage, peak-shaving plants and LNG terminals also get a brief mention.
Where it is Naturally, the focus is on North America, Europe (with western and central Europe treated separately) and the CIS. The rest of the world is treated less extensively for the very good reason that there is hardly any gas storage in the rest of the world.
Not only Gas storage has a whole range of functions. The primary one is to balance consumption with the available supply on an hourly, daily and seasonal basis. Consumption is highly sensitive to changes in temperature, especially in the residential sector and the peak winter take is an important parameter in setting the size of the distribution network and the storage requirement. In France, for example, on peak days storage supplies around 60% of gas demand.
But also Storage does more than this, however. It can help to reduce supply shortages (interruptions of supply, pipeline problems etc.) and, provided it is located at the consumption end, it can be used to increase pipeline load factor and hence to reduce the overall cost of gas distribution.
Export More and more, the availability of storage is becoming a direct commercial opportunity. In Europe, a significant amount of storage is "exported" – ie, gas is stored in one country on behalf of another, because the buyer is short of storage, often because it does not have the appropriate geological conditions for developing underground facilities. Storage in the USA In the liberalised US market, following Order 636, a number of distinctly more entrepreneurial activities have developed. A certain amount of gas is stored to exploit summer/winter price differentials and there is scope for arbitrage between storage, and the spot and futures markets.
Ultimate Hub services, where a hub operator assures customers that their supplies are kept in balance, usually depend on the operator having access to storage. The ultimate is the no-notice service, where nominations are made after the fact to maintain balance and avoid penalties or shortages. The table on page 17 shows the range of services provided by storage in the US (and potentially anywhere else).
Strategic storage Significantly, "strategic storage" does not appear in this list of US services – although in Europe, strategic storage figures quite substantially. Europe (or, at least, the mainland) is highly dependent on imports and the political risks posed – particularly by Russia and Algeria (both of which are major suppliers) – are cause for concern. Furthermore, gas import pipelines often cross countries where diplomatic relationships are strained and supply interruption can be used as a lever. This lends impetus to an interest in strategic storage, and Western Europe has enough capacity to replace the main external suppliers for six months.
Types of Storage Geology Underground storage comes in two main forms, storage in porous rock formations and storage in underground cavities. Generally, porous rock storage is sited either in depleted gas fields or in aquifers. Underground caverns are usually salt cavities, where salt is leached out by water to be replaced by gas under presssure, or, rather less commonly, abandoned mines and purpose-built mined cavities.
Large and slow The two generic types have very different characteristics and hence different uses. Depleted fields and aquifers usually have large capacity, but are rather slow to fill and empty. They are therefore generally used for seasonal storage, filling slowly in summer and putting out large volumes of gas over an extended period in winter.
Small and fast Cavity storage is far more responsive; it can be filled more quickly and can regenerate high flows of gas over short periods (but generally cannot store nearly so much gas). It therefore has great value for peak-shaving. Most of the newer commercial services being developed in the US require flows at short notice, and the amount of cavern storage is increasing quite rapidly.
Peak-shaving For the ultimate in peak-shaving where very high deliverability is required, often in the outer reaches of the pipeline distribution system, it is common to have peak shaving LNG plants, of very limited volume but very high deliverability. The same function can be performed by an LNG import terminal, provided it is in an appropriate location, and this is brought to something of a fine art by Distrigas in Boston.
Storage Costs, Reservoirs cheaper The difficulty of establishing costs is considerable and varies enormously from country to country and facility to facility. The report acknowledges this, but bravely gives indicative figures culled from Statoil, the EIA and the Gas Research Institute. It is pointed out that the lower figures generally represent US costs which are below the corresponding European ones. In general, it appears to be cheaper to store in depleted reservoirs than in salt caverns.
The Storage Conundrum. US storage growing It is very interesting to look at the different levels of storage provision in different countries. The US, which is by far the leading storage country, has a working volume equivalent to 18% of its annual gas demand. During the 1989-1991 period, there was a sharp decrease in capacity (12%), but since the passing of order 636 capacity has started to increase again to provide the new commercial services. This is largely salt cavern storage and a recent EIA survey has identified 81 projects which will increase capacity by 14%. Perhaps more significantly, it will increase the rate of withdrawal by 31%. The high state of development of storage is accounted for by a high level of (peaky) domestic demand (38% of total demand) with an air conditioning peak in summer as well as the winter heating peak, a long pipeline network and low swing production.
Thinking strategic In Western Europe, storage is equivalent to 12% of total demand or 27% of domestic consumption. It has risen by 33% since 1989. The variation between countries, however, is considerable. Italy, Germany and France are the leading providers of storage in Western Europe. Italy’s represents 25% of consumption and France’s 30%, both well above US levels. The former West Germany had a similar level of provision at 23% of consumption, but this has fallen with the re-unification of the country and a number of storage projects are under way to restore the position.
UK, Holland don’t The UK, by contrast, has only 5% of its consumption covered by storage, but, of course the UK relies much more on swing provided by fields and even on peak-shaving fields. Similarly the Netherlands has relied on swing production from Groningen and has no storage (other than a peak-shaving LNG plant). As Groningen starts to decline its ability to provide swing will reduce and there are three storage projects planned, two by NAM and one by Amoco that will be the equivalent of about 10% of consumption.
Others vary a lot Switzerland has no storage for a different reason; it has no suitable geological formations and therefore it imports storage gas from France, but only 2% of its annual consumption is covered. Belgium and Spain also have coverage in single figures, while at the other extreme Austria stores 40% of its annual consumption.
Sort out costs While some of these variations in policy are explainable it is very hard to see what the real economic optimum is. We are likely to find out fairly rapidly in the UK liberalised market, however. Come this autumn the new marketers will have to ensure that balance is achieved on a daily basis and they will have to evaluate the cost of providing peak gas. This should settle the question as to whether storage or beach swing or interruptible contracts is the cheapest. It is to be hoped that the current mix in the UK is about right or there could be some painful adjustment problems until a new equilibrium is achieved. Cedigaz believes that new storage will be essential for the UK shippers, but is cautious about how and when it will be provided, pointing to the current surplus of peak capacity and the high cost of existing storage.
The Future. Storage will grow Cedigaz sees an impressive future for storage – the report looks ahead to 2010. Increasing global gas demand plus an underprovision of storage in central Europe and the CIS are probably the main drivers. Some 200 Bcm of new capacity worldwide is forecast with an investment cost of $40 billion. Capacity should triple in central Europe, and mighty Gazprom is proposing to double its facilities – it is already the largest owner of storage in the world. Asia and South America are set to become significant players.
Strategic storage The major trends seen by Cedigaz are an increased number of structures with a high send-out rate, particularly salt caverns, and an increase in strategic storage, although one might question the real economic rationale for the latter. It will be interesting to see what happens to storage, particularly in those countries in Europe with significant strategic storage, should liberalisation come to pass.
Farewell, Sylvie It is only possible here to give a brief flavour of the 220-page report. It certainly stands as a worthy monument to Sylvie Cornot-Gandolphe, who has dedicated it to her family. May we dedicate this summary to you, Sylvie, and wish you all the best in your future career.
Gas Contract Debate - Round 5 The gas contract debate continues. Last month’s contribution from a buyer’s point of view (Gas Matters, March 1996, page 17) drew a swift and direct response from a sellers’ representative. The buyer’s conclusions were, the seller said, incontrovertible as far as they went – but they could be taken further. So, without more ado, let the debate resume ...