This past winter, during a period of extreme cold throughout much of our nation, a potential natural gas crisis was averted thanks to a supply chain designed to provide uninterrupted supplies of gas when and where needed. During one particularly cold event spanning late December to early January, an unprecedented amount of natural gas was needed to meet the increased demand for heat. Outflows from gas storage facilities during this period shattered a previous withdrawal record set four years ago. In the event of a supply crisis, the situation would have worsened due to the cold’s effects on production capabilities that were also hampered. Thankfully, a crisis never materialized due to the robust U.S. natural gas supply chain that responds to changes in supply and demand. In this case, the supply chain responded by sourcing additional gas from outside to meet soaring demand. Natural gas imports via Canadian pipelines and Liquified Natural Gas (LNG) shipments from abroad bolstered our supplies preventing a supply crisis while stemming potential price spikes on the natural gas spot market. In the end, most of us never knew (or even thought about) the risks short supplies of gas posed to our homes, families, and businesses during the brutally cold weather. We simply turned up our thermostats.
In previous articles, we’ve explored the production and pipeline portions of the natural gas supply chain. So, as we say good-bye to winter cold, I would like to look at the role of storage in the natural gas supply chain to understand the pivotal role it plays as a balancing mechanism to gas supply and demand fluctuations. We’ll also look at the rationale for storing gas, where and how its stored, and Oklahoma gas storage facilities.
Storage Basics & the Natural Gas Supply Chain
Natural gas is often held in inventory underground near regional consumption centers. Pressurized gas is typically held in depleted reservoirs in oil and natural gas fields, aquifers, and salt cavern formations. Above-ground tanks are also used for natural gas storage. In the U.S. most gas storage facilities are depleted oil and natural gas reservoirs, which are plentiful throughout much of the nation due to our long history of oil and gas production. The two most important characteristics of an underground storage reservoir are its storage capacity and the rate at which natural gas can be withdrawn also known as its deliverability rate. Salt caverns provide among the highest withdrawal rates of the three reservoir types, but they are also the most expensive to develop.
Underground storage is a vital part of the natural gas supply chain. Without it, consumers would suffer fluctuating supplies and prices of natural gas. The ability to store gas ensures reliability and flexibility in the supply chain regardless of weather, production, and pipeline capacity. Unlike other commodities, natural gas is integrated into the entire gas distribution system. Storage facilities store unrequired gas when pipeline capacity and demand are in sync. When demand surpasses pipeline supply, stored gas enters the distribution system to maintain an adequate supply. Additionally, market prices for natural gas are highly correlated with storage levels, meaning that low storage levels in the face of higher demand cause prices in the natural gas spot market to rise. Recent events in China provide a useful example of the value of natural gas storage to a national economy and supply chain.
The Value of Gas Storage to the Natural Gas Supply Chain – A Chinese Story
Last year, China became the 2nd largest importer of natural gas in the world. South Korea currently holds the number 1 spot. Imports have been the primary means of meeting rising demand as China enforces environmental policies aimed at curbing air pollution from coal-burning, especially in winter.
Due to limited storage capacity, China has had no choice but to turn to the LNG spot market where prices had risen since summer to $11.52/MMbtu on January 15 of this year. In the weeks since it’s December peak, LNG prices decreased to around $7.50 on March 20. Nonetheless, China will likely remain in its unenviable position of a leading importer for the next several years while the country works to triple its storage capacity over the next decade. Some market analysts are already raising doubts that this will not be enough to meet the certain winter demand peaks. Without adequate storage, increased heating demand will force China to import because it can’t build storage volumes over the Summer months as the U.S. and Europe do annually. I don’t intend to say, that we never or rarely import natural gas. We do. The point here is that because of our storage regime and facilities; we do are not reliant on the market to meet a large portion of our demand. Currently, China gas storage space is equivalent to about 3% of total demand. The U.S., with its mature natural gas supply chain, has a storage capacity of 17% of annual demand. The world average storage capacity is nearly 12%. To make matters worse, as a relatively new natural gas producer, China doesn’t have an ample inventory of depleted natural gas reservoirs and salt caverns. It will be interesting to see how they will meet this challenge.
The U.S. Natural Gas Storage System – How it Works
As mentioned previously, U.S. gas storage fields are located proximate to the nation’s consumption centers. Take a look at the maps below and notice how well correlated the storage locations are with major population centers.
When needed, gas is withdrawn from storage and enters a distribution system, a network of dedicated inter and intrastate transmission pipelines spanning the country. The U.S. natural gas pipeline network is so well integrated that it can transport gas to and from nearly any location in the lower 48 states.
Interstate and intrastate pipeline companies, local distribution companies (LDC’s), and independent storage service providers are the primary owners/operators of U.S. natural gas storage facilities. Although they may own the facilities, they rarely own the natural gas stored within them. According to the Energy Information Administration (EIA) most gas destined for the marketplace or “working gas” is held under lease agreements with shippers, LDC’s, or end users who own the gas. In Oklahoma, the 156 gas storage facilities are owned and operated by nine entities 4 of these are gas storage companies, 2 are pipeline companies, 2 are interstate pipeline companies, and one is an intrastate transmission company.
The U.S. Natural Gas Storage System Reporting
The EIA collects and reports on various aspects of our natural gas system through a series of weekly, monthly, and annual reports organized by region. For example, the Weekly Natural Gas Storage Report provides end of the week gas in storage at the company and regional levels through a survey sample of natural gas storage operators. The Monthly Underground Gas Storage Report collects data on total capacity, base gas (the amount of gas considered as permanent inventory), gas available for withdrawal (working gas), gas injections into storage, and storage withdrawals from all storage operators.
EIA’s weekly storage report seen below reports working gas storage in the lower 48 states by region. As you can see, Oklahoma is in the largest, South Central region. The report compares storage inventories between last year and current year. Notice inventories are slightly down from last year, likely due to the colder temps we’ve experienced in recent weeks.
The graph below, also from EIA depicts gas storage volumes compared with the 5-year minimums and maximums. Notice the seasonality associated with injections into storage during the warmer months of the year.
Oklahoma Storage Facilities, facts, & figures
The following tables help shed light on Oklahoma storage facilities. The first table is a historical look at Oklahoma storage capacity 2011-2016. You’ll notice most of the storage is in depleted fields. We have no salt caverns for storage, and the only aquifer storage we have is now inactive, according to the EIA.
Gas storage facilities lie at the intersection of supply and demand forces in the global natural gas marketplace. Throughout the supply chain, governments, producers, storage operators, pipeline companies, distributors, and large gas consumers are working toward more efficient, viable, and consistent systems for meeting natural gas demand worldwide. As the U.S. expands its LNG export capabilities in the coming years and becomes a major natural gas exporter, natural gas storage and transmission will undoubtedly be key in our national LNG strategy. And when it comes to providing safe, reliable natural gas heat to homes and businesses during Oklahoma’s coldest seasons, we can be thankful for the gas stored underneath our lands and the distribution infrastructure ensuring a continuous supply.
Sources:
U.S. Energy Information Administration
Federalregister.gov
WorldOil.com
OklahomaMinerals.com
Interstate Oil & Gas Compact Commission (ogcc.ok.gov)
Black & Veatch (BV.com)
Julie Parker has a decade of experience serving the Energy industry where she became an expert in the integration and application of geospatial technologies to exploration and production projects and workflows. Ms. Parker entered the industry in 2006 when she became the first GIS Director for Chesapeake Energy, a large independent producer of natural gas headquartered in Oklahoma City, Oklahoma with operations throughout the U.S. During her tenure at Chesapeake, Ms. Parker built and lead a robust, cross-functional GIS department that gained a reputation for developing and deploying leading edge solutions for nearly all areas of the company.
