Is an LNG-driven gas storage shortage looming?
* Working gas design capacity equal to 4,014 Tcf;
* Effective capacity equal to 3.813 Tcf;
* Non-coincident peak inventory volume of 3.593 Tcf.
While these numbers may not raise any red flags as far as supply and demand, they don't necessarily signal issues with storage and capacity utilization, or a need for additional capacity.
The last two winters were milder than usual. By now, we are continuing that trend--or not.
In November 2005, the U.S. market was at a record high inventory level in advance of what many predicted to be a harsh winter as signaled by earlier than usual severe storms in the West. As the season unfolded, however, early warming trends left gas in storage with the season ending at an unprecedented level with 1.695 Tcf in inventory as the 2006 injection season commenced. But what does this tell us about efficient levels of storage utility?
At last read for this winter, total inventory peaked for all three storage regions at 3.461 Tcf. Now look at the winter of 2002-03. During that season we witnessed a storage drawdown to 623 Tcf. One might conclude from these separate events that efficient capacity utilization in the market is 2.838 Tcf.
Is This a Meaningful Conclusion? What Other Marker Can Be Used?
Another market dynamic that might be used is peak utilization. For this we simply look for the peak withdrawal and peak injection experienced in any storage season. Coincidentally, both of these peak numbers occurred in the same storage cycle when the winter drawdown of 2003 totaled 2.549 Tcf and the following injection season saw 2.564 Tcf go back into storage for the following winter.
Does this data suggest that the market may only utilize 75% or less of the total effective working capacity estimated by EIA? And, is their a need for more storage capacity?
Today, based on AEO 2006, we are in a nominal 21 Tcf annual market. In addition to that, daily sustainable supply from traditional sources (Production and Imports, LNG exempted) totals about 57.5 Bcf/d, or 21 Tcf annually; placing supply at equilibrium with demand. In the market, production remains relatively static through the year (exempting disasters) while consumption is much more erratic, shaped by heating and cooling demand. The nominal summer market averages about 50 Bcf/d, while the winter demand period can average more than 72.5 Bcf/d, with daily peaks and troughs balanced with storage.
The summer consumption pattern, therefore, provides 7.5 Bcf/d of surplus gas for storage injection from traditional sources. Assuming an average injection cycle of 200 days, this adds 1.5 Tcf to inventory which would permit 9.1 Bcf/d to be drawn down over a 165-day winter, thereby maintaining a balanced storage position from year to year (i.e. 1.5 Tcf in, 1.5 Tcf out.)
What is important to note here is that in a colder than normal market requiring 2.5 Tcf of storage gas, we are short by about 6 Bcf/d during the winter. Absent other supply sources, this market will adjust by drawing further from inventory, i.e. the April 2003 drawdown, or through demand destruction, typically curtailment of industrial usage.
Generally, the market will experience a combination of the two events, which will fully be accomplished in the cash market by price competition. At the current production level, and winter storage utility of 2.5 Tcf, the market will need to store an additional 5 Bcf/d during the injection cycle to maintain a balanced position from year to year. This will require summer consumption to be reduced to an average of 45 Bcf/d.
Now factor in LNG. AEO 2006 indicates LNG will grow from a current (2006) average import rate of 278 MMcf/d to approximately 7.5 Bcf/d by 2013. During the same period, demand is expected to grow by an estimated 7.7 Bcf/d. Assuming this demand growth takes the shape of the traditional market (winter demand growth exceeding summer demand growth,) consider the timing of LNG imports and how this impacts the global demand for LNG.
Analysis of the global picture is beginning to reveal certain facts about LNG. Most pertinent to this discussion is the fact that Western Europe has precious little storage capability. Nations like Spain, France, Italy and Great Britain rely heavily on LNG as a primary energy source. Without storage for their peak-day requirements in the winter, these nations are totally captive to the arrival, offloading and vaporization of LNG. In this environment, the U.S. will have to compete.
As time progresses, the picture will become more clear, but I believe that:
* U.S. domestic markets must rely on LNG, and
* Global head-to-head competition for LNG supply will drive price volatility.
I also submit that there will be few means available for end users to mitigate the extreme winter price exposure in the domestic market. The most viable will be to purchase substantial volumes of LNG during periods of lowest demand (summer) and store gas for winter consumption. That scenario is supported by current EIA and DOE projections regarding additional storage capacity. They estimate an additional 350-500 Bcf of working capacity will be needed by 2015 to meet the seasonal demand quotient of U.S. domestic markets.
As the accompanying chart illustrates, traditional sources of supply are barely able to meet Net Consumption figures at this point (note: supply and demand datum has eliminated field use volumes, shrinkage, transmission fuel, and other losses to reflect net gas to be available to the market and projections for net gas consumption.) Going forward, Traditional Sources remain roughly stagnant while consumption begins to increase. The Net Available function adds LNG to the Traditional Sources curve and, in essence provides the needed (surplus) to the equation that allows for gas to be injected into storage in the future.
Author: Steve Martin is a partner of CABO Energy Enterprises LLC, a Houston-based consulting company that provides energy marketing expertise to independent producers. He, along with Steve Conant, also of CABO, are faculty to The Oxford Princeton Program, Inc. They will lead "North American Natural Gas Transportation and Storage," a new course offering to be hem in Houston (May 2, 2007) and Denver (Sept. 12, 2007). For more information, visit www.oxfordprinceton.com or call (609)520-9099.
Steve Martin, Faculty Member, The Oxford Princeton Program, Princeton, NJ
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|Title Annotation:||supply and demand of liquified natural gas|
|Comment:||Is an LNG-driven gas storage shortage looming?(supply and demand of liquified natural gas)|
|Publication:||Pipeline & Gas Journal|
|Date:||Jan 1, 2007|
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