After more than a decade of lackluster performance, natural gas storage assets are back in vogue, and thriving. Consider the following gas storage trends in the U.S.:

1. Lease rates for securing Firm Storage Service (“FSS”) have reached and exceeded levels last seen during the super-cycle in mid-to-late 2000’s,
2. there is intense competition amongst customers to secure capacity and willingness to commit to longer-term contracts,
3. sizable brownfield capacity is in various stages of development,
4. recent M&A metrics for gas storage are robust; and,
5. after more than a decade long hiatus, greenfield capacity additions are now being actively pursued.

The golden age of gas storage version 2.0 is truly underway!

While the current resurgence in gas storage is reminiscent of the 2000s –an era which saw ~400 Billion cubic feet (“Bcf”) of storage capacity additions, the market drivers providing the tailwinds today are drastically different from the first cycle. Both cycles, however, have the net effect of supporting higher levels of price volatility which contributes to increasing FSS rates.

The first super-cycle in gas storage (prior to the advent of shale gas) was with a backdrop of U.S. running out of natural gas with heavy reliance on LNG imports to meet rising base load demand from the power generation sector. It was the period of rapid growth in base load combined cycle gas-fired power plants pushing out coal in the generation stack. Declining U.S. gas production, rising base load demand and the inherent supply-demand mismatch of LNG imports with base load demand growth provided the impetus for higher gas prices, elevated levels of price volatility and rising FSS rates that supported greenfield development. Gas marketers and trading firms (including many banks) were the sought after customers that were willing to pay for the extrinsic value of storage while the operational customers such as utilities, and power generators largely relying on the intrinsic value of storage – fill during summer for use in winter with the objective of supply reliability and reducing their average cost of gas. 

What changed?

The tremendous success of shale gas and tight oil in the U.S. led to a structural shift in U.S. gas markets – from import dependency to self-sufficiency and gas exports. The resultant supply overhang reduced gas prices, flattened forward curve and compressed seasonal spreads (or intrinsic value of storage). The supply overhang and low gas prices also contributed to reduction in the intensity of price dislocations, thus lowering price volatility (or extrinsic value of storage). Consequently, FSS rates deteriorated during the last decade, until early in this decade when a confluence of market factors contributed to ushering in the golden era version 2.0. The following graphic shows average FSS rates for high-cycle service (typically from salt cavern storage) and low-cycle service (typically depleted reservoir storage) in the U.S. Gulf Coast.

What is fueling the resurgence of gas storage- version 2.0?

The gas storage super-cycle we are experiencing today is fueled by the operational needs of market participants to match gas supply with their respective gas usage patterns and to a much lesser extent the “trading” value of gas storage. Market participants like LNG exporters, power generators, pipeline operators and gas/electric utilities now heavily rely on the use of “highly responsive” gas storage capacity to manage ever increasing need for operational flexibility in today’s fast-evolving gas market.

For example,

1. LNG exporters can utilize no-notice highly responsive storage injections to avoid punitive pipeline imbalance fees and/or commodity price risk when forced to monetize their long position at a liquid hub during short periods of unplanned outages. Extrinsic and intrinsic values derived from potential movements of the forward strip do not influence the value ascribed to FSS service by the LNG exporter.
2. Likewise, hourly volatility in wind /solar generation requires gas fired power plants to follow the net load backed by non-ratable gas supply. High-deliverability gas storage assets are well suited to match supply to the load profile of generators in the vicinity. Increased role of wind & solar resources will amplify intra-day load swings requiring flexible gas generation sources to act as buffer resulting in need for Load Following Hourly Balancing (“LFHB”) services offered by gas storage operators. Power plants value this service based on cost of alternatives available in the market and exposure to punitive hourly imbalance penalties levied by the gas pipelines.

The intense competition for highly flexible gas storage space seen in Version 2.0 and the underlying operational needs as shown in the table has also resulted in longer-term commitments which are more aligned with lender expectations for underwriting brownfield and greenfield development.

Increased LNG exports will tighten U.S. markets providing further impetus for higher volatility and higher FSS rates. Overall, U.S. Gulf Coast gas requirements across sectors is expected to rise at a significantly faster pace than projected increases in the U.S. Gulf Coast gas supply. Consequently, despite growth from Permian and Haynesville, U.S. Gulf Coast supply will fall short of requirements, pushing U.S. Gulf Coast to be a net short by 2025 and increasing reliant on tier 2 supplies from Appalachia & Midcontinent. The confluence of these factors will support higher price levels, spreads and volatility. A spate of recent gas storage M&A activity corroborates the need for increased gas storage injection-and-withdrawal flexibility in the U.S. gas market. While price levels, price spreads and volatility will remain elevated, operational needs of market participants supporting non-traditional services will have a greater influence on storage capacity requirements and FSS values.

What are the investment risks?

As we advance into the golden era version 2.0, investors should understand the overall investment risks and the probability of a capacity overbuilt as was seen in the last cycle. There are several key questions that potential investors, developers and market participants should ask:

1. How much of this highly flexible gas storage capacity is needed by 2030/2035?
2. How does the timeline for new gas storage capacity look on a risk-adjusted basis?
3. Have FSS rates reached greenfield economic threshold?
4. What are the indications from the current M&A valuations for gas storage?
5. From a market perspective, which locations/storage types are better situated than others?

Our analysis indicates that U.S. gas markets are structurally short on gas storage capacity and the imbalance will be amplified in the future.

-Amol Wayangankar

If you are interested in the U.S. gas storage outlook and obtaining a detailed analysis on the overall investment risk in this sector, please contact us at info@enkonenergy.com. We encourage you to subscribe to our articles to get weekly articles via email.

Enkon Energy Advisors is a boutique consulting firm specializing in oil & gas, and energy transition since 2012. We bring deep expertise in a range of markets including natural gas, NGLs, Oil, LNG, and Energy Transition where we provide commercial and market advisory to investors, energy companies, and project developers with consulting services, subscription reports, and analytics, with the goal of delivering commercially actionable outcomes to our client.