NEWS Changes mark North American gas operations

Sept. 4, 1995
New underground storage and market hubs characterize the evolving North American gas market. A study Foster Associates prepared for the Ingaa Foundation says the Federal Energy Regulatory Commission's Order 636 increased the service value of storage and hubs. The order did so by shifting responsibility of supply arrangement to end use markets and requiring a change to straight fixed-variable design for pipeline rates.

New underground storage and market hubs characterize the evolving North American gas market.

A study Foster Associates prepared for the Ingaa Foundation says the Federal Energy Regulatory Commission's Order 636 increased the service value of storage and hubs. The order did so by shifting responsibility of supply arrangement to end use markets and requiring a change to straight fixed-variable design for pipeline rates.

Four hundred underground storage sites in the U.S. offer 3.5 tcf of working gas capacity and 70 bcfd of deliverability. Ten Canadian sites have capacity of 500 bcf and deliverability of 7 bcfd.

U.S. Gas Storage Vital Statistics chart (30436 bytes)

Storage capacity

Foster's report said interstate pipelines own 61% of U.S. working gas storage capacity. They have contracted most of the capacity to customers, mainly local distribution companies (LDCs), retaining an average 13 percentage points of the 61% for operational needs and to provide no-notice service.

Most LDC storage is in the East North Central area and in California.

"Traditionally, LDCs have invested in and contracted for storage capacity primarily to meet their seasonal and peak day requirements," the Foster report said.

"However, recent un- bundling of services at the LDC level has resulted in LDCs offering storage on a contract basis to third parties, both on system and off system customers. A survey of the largest LDC storage owners found that those controlling 80% of the working gas capacity offer storage service to third parties."

Unlike the case in the U.S., Canadian producers own 31% of storage, distribution companies 55%, and pipe- lines 14%. Storage totaling 62 bcf has been proposed, an increase of 14%.

Sixty U.S. storage sites are proposed or under development.

Foster said construction of all those facilities, an unlikely event, would add almost 500 bcf of working gas capacity and about 19 bcf of withdrawal capacity, or 14% and 26% respectively, to existing storage capacity and capability.

There are several reasons for the current interest in gas storage:

  • Improved competitive position of storage services (the effect of shifting to a straight fixed-variable cost allocation and rate design methodology and unbundling of pipeline services).
  • New services offered by storage -- market hub services, for example.
  • New market demand potential in power generation.
  • Potential for market based rates.
  • Development of multiuse storage facilities.
  • Desire to take advantage of short term price fluctuations in gas supply costs.

Old and new

New storage sites differ from traditional storage because they are being developed on a stand alone basis, with success based on economics, rather than as a means of meeting bundled service requirements.

Also, many projects are being developed as joint ventures, some will offer services at market based rates, some are offering more flexibile services, and more than 60% of new deliverability is being developed at salt domes.

The paper cited location as an important consideration of storage: "Production area storage can be used by suppliers to improve operational efficiency by leveling wellhead production rates and pipeline throughput volumes.

"Market area storage is traditionally used to improve market efficiency by meeting peak and seasonal requirements, resulting in higher load factors for long haul transmission capacity."

Market hubs

Foster said about 35 major market centers and hubs have sprung up across the U.S. and Canada.

Few of them were in business before implementation of FERC Order 636. Those that did exist were mainly market centers or locations of multiple buyers and sellers in the producing areas.

Market centers become hubs by offering a greater menu of services, including marketing, loaning, wheeling, and title transfer, as well as electronic trading at the hub and between hubs.

While these services are not advertised, they are defined less specifically than other gas industry services and are evolving as dictated or requested by customers.

Hubs are being developed by various industry participants -- pipelines, distributors, producers, marketers, and independent operators. Services they provide depend on the hub location and facilities.

Foster said, "Many hub services are provided alongside other services offered by LDCs and pipelines. To some extent, therefore, these services can be considered as by-products of the main services offered by these companies. As a result, certain issues have evolved -- firm vs. interruptible service obligations, regulatory jurisdiction, and revenue sharing."

Two important hub characteristics are the number of pipeline connections, along with associated capacity, and storage capacity. Hub promoters generally advertise the number of connecting pipelines, direction of flow and capacity, distance to more important centers, and access to storage.

Many hubs have onsite storage capacity that permits parking or lending of gas volumes for various durations of supply or market disruptions. In fact, many traditional and new storage developers advertise themselves as hubs, rather than simply providers of storage.

Hubs post rates for the services they perform.

"However, competition and the uncertainty of the value added by hub services have resulted in sharp discounting of these rates at most hubs," the study said.

"Many industry participants feel that the number of hubs and the services they offer will be reduced by competitive forces," the study said.

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