Economics of Storage

Underground natural gas storage presents a variety of economic justifica­tions, depending on the perspective of the entity attempting to value a facil­ity or service. In traditional rate making, the value attached to natural gas storage service was determined by the avoided cost economics of alternatives such as no-notice service. While avoided cost still plays a role for utilities, the value of natural gas storage is now evolving to valuing the services realized from expanded gas sales.

In general, as we see in the Figure 8.7 graph, high gas prices are typically associated with low storage periods. Usually when prices are high early in the refill season (April to October), many storage users adopt a wait-and-see attitude and limit their intake in anticipation that the prices will drop before the heating season (November to 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 that rely on storage to meet seasonal demands of their customers. On the other hand, other users

FIGURE 8.7

North America natural gas storage levels, 2000 through 2006.

who use storage as a marketing tool (hedging or speculating) will delay stor­ing large quantities when prices are high.

As with all infrastructural investments in the energy sector, developing stor­age facilities is capital-intensive. Investors usually use the return on invest­ment (ROI) as a financial measure to determine the viability of such projects. It has been estimated that investors require a rate of return between 12 and 15% for regulated projects and close to 20% for unregulated projects. The higher expected return from unregulated projects is based on higher perceived mar­ket risk. In addition, significant expenses are accumulated during the planning and location of potential storage sites to determine their suitability, and this further increases the risk. The capital expenditure to build a facility depends primarily on the physical characteristics of the reservoir. The development cost of a storage facility largely depends on the type of storage field.

As a general rule, salt caverns are the most expensive to develop on a billion-cubic-feet-of-working-gas-capacity basis. However, keep in mind that the gas in such facilities can be cycled repeatedly on a deliverability basis and thus may be less costly. A salt cavern facility may cost $10 million to $25 mil­lion per billion cubic feet of working gas capacity [4]. The wide price range is the result of region differences that dictate the geological requirements. These factors include the amount of compressive horsepower required, the type of surface, and the quality of the geologic structure.

A depleted reservoir costs $5 million to $6 million per billion cubic feet of working gas capacity. Another major cost incurred for a new storage facility is base gas. The amount of base gas in a reservoir may be as high as 80% for aquifers, making them very unattractive for development when gas prices are high. Salt caverns require the least base gas. The high cost of base gas is what drives the expansion of current sites instead of development of new ones. Expansions do not require much additional base gas. The expected cash flows from such projects depend on a number of factors such as the services the facility will provide and the regulatory regime under which it will operate. Facilities that operate primarily to take advantage of commod­ity arbitrage opportunities are expected to have different cash flow benefits from facilities used primarily to ensure seasonal supply reliability. Rules set by regulators can restrict the profits made by storage facility owners or conversely guarantee profits, depending on the market model.

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