In the energy industry, we talk about natural gas storage a lot. It’s a term that frequently comes up in articles, we include it every week in our APPI Energy Advisor, and power markets rise and fall based on the weekly report submitted by the U.S. Energy Information Administration (EIA). However, we rarely discuss what natural gas storage actually entails, how it is measured, and who controls it. In this article, we’ll discuss what natural gas storage means, why it is important, and how APPI Energy utilizes that info to better serve our clients.
The basic principle of natural gas storage is, at its core, the principle of supply and demand. We store natural gas during periods when demand is low (for example, when the weather is mild), to be withdrawn during periods of peak demand. However, these are not the only factors in play, when it comes to storage. Regulatory concerns, contractual obligations, emergency reserves, and market speculation are all considerations for commodity owners who utilize natural gas storage.
So, first and foremost, where is natural gas stored? Typically, in the U.S., we utilize depleted natural gas or oil fields, especially those located near consumption centers, areas of high natural gas usage. However, in some parts of the country, we’ve been known to use aquifers (underground layers of water-bearing rock), and salt caverns as storage facilities. These latter two have some conditions that can make them costlier than simply using depleted reservoirs, but are still viable solutions.
The owners and operators of natural gas storage facilities are private organizations, categorized as inter- and intra-state pipeline companies, local distribution companies, and independent storage service providers. The first two utilize a portion of their storage, logically, to engage in “load balancing”, a term which refers to the practice of storing natural gas during periods of low demand, to be distributed via the company’s pipeline during periods of higher demand. These companies can also increase revenue by leasing out their storage capacity to other participants in the industry. Thus, the pipeline companies are both vertically integrating (by controlling both storage and transportation in the natural gas supply chain) and driving revenue via leasing capacity.
Operators of underground natural gas storage facilities are bound by U.S. law to report the gas they have in storage on a weekly basis to the EIA. This storage data is used by many companies, agents, traders, and individuals in the industry in determining the appropriate price for natural gas futures, as well as painting a clear picture of the factors affecting natural gas supply and demand. Storage is measured in cubic feet, usually on a scale of billions. EIA measures and reports on the total capacity, in billion cubic feet or Bcf, of all storage facilities, the gas currently in that storage, the daily withdrawal and injection capability of each facility, and the base gas, a measure of permanent inventory used as a reserve for the withdrawal season.
As consumers of power (whether it is natural gas or electricity), the process by which natural gas is stored, priced, transported, and distributed directly has an impact on the prices we pay to power facilities in both our professional and personal lives. As such, while natural gas storage isn’t a subject frequently discussed outside the energy industry, it does have an impact on many activities in our day-to-day existence.
Natural gas storage, as a metric, is one of many we analyze at APPI Energy in determining market trends, and something we consider when making recommendations for our clients. As we’ve explained in previous articles, the price of natural gas and the price of electricity are closely related. The price of natural gas is a function of supply and demand, and storage is a major supply factor. Therefore, as a public-facing and regularly available point of data that directly impacts power prices, we monitor the storage of natural gas consistently and utilize it to help our clients make informed decisions about their next energy supply contract.
For more information about our process, and how we use data-driven analytics to supply our customers with tailored energy procurement solutions, please contact APPI Energy via the web, or at 800-520-6685.