Ken Silverstein EnergyBiz Insider Editor-in-Chief

Heating season is here and there is enough natural gas in the ground to meet this winter's expected demand. But, commodity price volatility will continue -- a situation that necessitates more such storage facilities get built. Columbia, for example, is asking the Federal Energy Regulatory Commission to grant it approval by year's end so that its facility can begin operations by the spring of 2008.

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 is used not just for home heating in the winter but also to power air conditioners in the summer.

There's a lot of natural gas sitting in storage right now. According to the Energy Information Administration, 3.42 trillion cubic feet is stockpiled. That's 11 percent more than the five-year average and nearly 13 percent above last year's storage levels. The added safety cushion has helped push down prices from a year ago.

The agency adds that all nine underground natural gas storage projects completed during 2005 were expansions or upgrades to existing facilities rather than new facilities. Thirty-eight underground natural gas storage projects have either been approved or are under review by FERC or other appropriate jurisdictional authority. Of those, 15 are new facilities and 23 are expansions to existing facilities, and have the potential to add as much as 197 billion cubic feet to existing working capacity, as well as increase the daily deliverability by 9.5 billion cubic feet per day.

The storage business has transformed itself from one that warehouses natural gas to an asset that is used to profit from price volatility. The evolution has produced more flexible storage options that can better serve customers and in doing so, created new opportunities for storage owners.

Traditionally, companies have used depleted natural gas or oil fields that are located close to consumption centers and injected gas in the summer when prices were low and withdrew gas in the winter when prices were high. That amounts to one cycle per year that takes about 315 days to complete. With more flexible storage facilities, gas can be cycled between four and 12 times a year. Many companies indicate they must be able to cycle at least four to six times annually.

"We believe an additional market opportunity for salt-dome storage services exists in the mid-south region and along the east coast," says Greg Welch, president of Mobile, Alabama-based Bay Gas Storage Company.

Diverse Needs

Salt Caverns are generally located in the Gulf States, although some are being developed in the West, Midwest and Northeast. Those facilities represent only 3 percent of all storage working gas capacity but about 15 percent of all gas that is delivered.

Leaf River Energy Center is a new salt cavern natural gas storage facility to be constructed in Mississippi and it will offer 12 turns per year. When it is fully developed, it is expected to have a capacity of 48 billion cubic feet. Duke Energy Gas Transmission Company, meantime, used to be heavily focused on using traditional storage. Now, however, its "Market Hub" facility in Louisiana can be cycled several times a year -- all to better serve its customers who are trying to take advantage of price volatility.

During price swings, the value of owning underground storage that is flexible increases. Marketing organizations have capitalized on that uncertainty and profited accordingly. Meanwhile, new technologies are being developed that permit the more traditional facilities to be cycled as often as four to six times annually, although only about 10 percent of those are capable of being modernized.

"Tighter supplies improve the value of storage," says Tony Clark, principal in Houston-based SGR Holdings, a developer of gas storage facilities.

A study performed by the National Petroleum Council indicates that there may be a need in North America for 700 billion cubic feet of new storage between now and 2025. Another study by the INGAA Foundation says that 651 billion cubic feet of new storage may be needed in the United States and Canada by 2020.

But, according to FERC's staff, "geology, economics and environmental impacts" may stall development. That's why new fields have not been built in recent years, and also why so many older facilities have been abandoned. "The development of new storage infrastructure could cost-effectively help customers maintain service reliability and manage commodity price volatility."

Traditional storage -- so-called depleted reservoirs that are cycled once a year -- allows distribution companies to warehouse gas during lower-priced periods instead of having to purchase the commodity at the most unpredictable times. Conversely, energy marketers use salt cavern storage to bolster their flexibility and to create profits by injecting gas in the ground when prices are low and pulling it out when prices are high.

With demand for natural gas projected to outstrip supply, even more attention will be paid to optimizing our natural gas storage options. If the issues affecting communities and landowners can be addressed and storage operators can prove there is a market need for their projects, federal regulators are likely to give them the go-ahead.

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

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