Ken Silverstein EnergyBiz Insider Editor-in-Chief

With price pressures always constant, an added emphasis has been placed on underground storage. The overall uncertainty may mean that utilities will want to get gas into the ground in the coming months to ensure reliability.

National policy-makers understand the importance of underground natural gas storage, which can supply as much as 30 percent of our consumption during peak demand. It has become even more paramount as the demand for gas rises and it is used not just for home heating in the winter but also to produce the electricity that powers air conditioners in the summer. That's why the Federal Energy Regulatory Commission has been progressive when it comes to approving new storage facilities.

Chevron Global Gas filed last November with the FERC an application to build two storage caverns in Colorado. It says the facilities would be initially operational by 2008 and fully operational by 2010. "Natural gas represents one of the energy industry's greatest growth opportunities," says John Gass, president of Chevron Global Gas. "Natural gas is expected to outpace demand for crude oil over the next two decades and is fast becoming the fuel of choice for homes and industry."

Last fall, of course, the price of natural gas rose to as high as $14 per million BTUs when supplies from the Gulf of Mexico were cut off in the wake of Hurricane Katrina. Today, the energy picture as it relates to natural gas looks fine. The futures price for natural gas to be delivered in June is moderate at $6 per million BTU while the Energy Information Administration reports more than 2 trillion cubic feet of natural gas in storage. That's 53 percent more than the five-year average for this time of year.

The value of storage tends to rise when demand for natural gas outstrips supplies. In the early 1990s when natural gas became the fuel of choice, demand sharply rose as most planned generators were to be fired with the fuel source. But, production remained flat as new wells were harder to find while restrictions remained on a lot of potential spots that were under federal control.

Altogether, the FERC has approved an increasing number of natural storage facilities to protect against potential shortages. Meantime, a study performed by the National Petroleum Council indicates that there may be a need in North America for 700 billion cubic feet (bcf) of new storage between now and 2025 while the INGAA Foundation says that 651 bcf of new storage may be needed in the United States and Canada by 2020.

"The development of new storage infrastructure could cost-effectively help customers maintain service reliability and manage commodity price volatility," says a FERC report.

Valuable Assets

Companies have traditionally injected gas in the summer when prices are low and withdrawn it in the winter when prices are high using so-called depleted reservoirs that can be cycled once a year. But now, newer facilities utilizing so-called salt caverns can be turned over 4 to 12 times a year to better serve customers.

Without a doubt, the traditional need for storage -- summer deposits and winter withdrawals -- is still prevalent and necessary. Local distribution companies that must deliver gas to customers are the biggest users of such services.

The chief reason is that such usage serves as a reliable source to meet high priority residential and commercial demand on peak days. It's also a valuable asset because traditional storage allows distribution companies to warehouse gas during lower-priced periods instead of having to purchase the commodity at the most unpredictable times. Natural gas production has never been high enough to meet peak demand in the winter, necessitating the use of storage to supplement that shortage.

Local distribution companies and others use a number of strategies to cope with the potential of higher natural gas prices. It's a guessing game as to whether prices will go up and so many buy at varying points in the cycle so as to hedge against extremes. With prices at $6 per million BTUs right now, it may be a bargain to buy as much as possible and then to inject it until the winter heating season. And, if there's another major hurricane, the price could really shoot up. Then, again, if prices fall, those distribution companies bet wrong.

Aquila leverages its storage assets. Its Katy facility, for example, can be cycled multiple times a year. It says if utilities had storage leases that gave them the ability to frequently inject and withdraw natural gas, they could better manage their electricity purchases from base-load plants. While storage typically acts as a hedge against future higher prices, utilities could certainly sell any surpluses on the open market during tight times.

Along those lines, Atlanta-based AGL Resources has proposed expanding one of its salt-dome storage facilities in Louisiana that can be turned over many times a year. The storage facility is located near the Henry Hub. That connects Louisiana's producers and end users to the nation's natural gas pipeline energy infrastructure and it is the central pricing point for natural gas futures.

"Our proven record (has) provided benefits to local distribution companies -- and their end-use residential, commercial and industrial customers...," says David Jewell, vice president of operations at AGL's facility in Louisiana. "Natural gas salt dome storage is safe and one of the best methods to protect against supply interruptions. Storage has been, and is expected to continue to be, important during hurricanes, and particularly now that price stability and supplies are important."

As the nation's thirst for new energy supplies gets stronger, so, too, will the demand for natural gas. In turn, that will increase the value of storage that helps utilities meet peak demand during the winter heating months. With hurricane season upon us and the potential long-term implications of that, the added reliability is comforting.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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