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Natural Gas Storage: Salt of the Earth Concerns

May 13, 2015 | By Luke Larsen

Each week the U.S. Energy Information Administration (EIA) issues its widely followed storage change report for the following three U.S. regions: Eastern, Western and Producing. The regional classifications include an additional distinction for the Producing area and thus the government agency subsequently segregates the survey data further in order to differentiate between Salt and Non-Salt storage facilities.

EIA Storage Reporting Regions

According to the EIA definition and PointLogic’s viewpoint, Salt caverns are unique and valuable in that they can provide very high withdrawal and injection rates compared to their relatively low working gas capacities. Furthermore, their base gas requirements are modest at best in relationship to other underground storage facilities, such as aquifers.

The salt dome formations that exist along the southern coastal states were developed primarily for its geological attributes to store hydrocarbons as well as its proximity to traditional producing areas such as Texas and the Gulf of Mexico. Unfortunately, these natural formations do not exist in major consuming areas of the country such as the Midwest and the Northeast. Hence, the classification of salt storage activity as reported by the EIA is reserved with the Producing Region reporting area.

Underground Natural Gas Storage Facilities in the Lower 48 States

With the peak summer injection period fast approaching – amid the continuance of robust production in the Eastern U.S. and infrastructure being re-tooled to allow more gas to flow south – whispers abound regarding the prospects of current arbitrage economics bringing Salt capacity to the brim in the months ahead. In this week’s edition of PointLogic Energy’s Get the Point we examine that very prospect by reviewing current conditions, assessing the historical salt operating levels and, finally, we project the course of this seasonal cycle as it relates to the existing and upcoming market dynamics.

The EIA started requiring and subsequently began reporting the producing region distinction of Salt versus Non-Salt Working Gas levels in December of 2006. That initial late December week revealed that less than 1 trillion cubic feet of the Producing region to be more than an 8 to 1 ratio of working gas inventory levels for Non-Salt to Salt. Since then the largest cumulative reported Producing Region inventory has been just shy of 1.3 Tcf, which occurred storage week ending November 8, 2013. At that time the Non-Salt to Salt declaration ratio was roughly 3 to 1 or 965 to 332 Bcf accordingly.

However, the benchmark of record inventories in the Producing region does not correlate with the U.S. inventory record – the early November 2013 period was roughly 100 Bcf shy of such a feat. The largest recorded week for the lower-48 was 3.929 Tcf at the end of the 2012 injection season. This all-time high for working gas inventory came in spite of the record heat and associated power generation levels that had occurred earlier that summer.

The largest reported Salt working gas level was 332 Bcf, which is the same date, November 8, 2013, when the Producing Region recorded its highest mark. However, the large variation in the ratio across the entire reporting range shows that the integrity of the Non-Salt to Salt relationship is somewhat suspect. Considering the largest statistical anomalies did move above 10 to 1 on occasion, but for the most part these fell in the earlier years of this reporting methodology and since then the data has failed to yield similar results.

Looking at the EIA’s calculated values for Salt storage shows that highest maximum five-year levels generally occur in the November-December time frame. This somewhat correlates with overall storage activity for the month November, but generally stretches into December because early winter season withdrawals of Salt isn’t typical unless that supply is needed during extended below normal weather events.

EIA Salt Storage: Weekly Max of 5-Year Average

In the recent EIA weekly storage change report dated May 1, the lower-48 increased 76 Bcf of working gas inventories. The composition of that injection was made up of a 31 Bcf increase in the East, 7 Bcf in the West as well as a gain of 38 Bcf in the Producing Region. Within the Producing region, this 38 Bcf injection was represented by a 14 and 24 Bcf injection in the Salts and Non-Salts, respectively.

As a result, the current cumulative Salt storage balance now is 223 Bcf and this reflects not only a year over year surplus of 111 Bcf, it also is considerably above the five-year average to the tune of 53 Bcf. However, it is still below the maximum amount for that reporting week, which is 244 Bcf. That benchmark was set back in April-May 2012 after one of the warmest winters on record left storage coffers at record highs.

Managing a Salt storage asset is rather unique in that because of the aggressive cost structure and speed at which one can inject or withdrawal gas from the facility. Theoretically, one can turn the notion of completely maxing out a storage asset then depleting it to empty numerous times in a given year. So instead of seeing ratable summer injections and winter withdrawals, you see a much more scattered pattern as it relates to net change with a tighter deviation from the unchanged or the zero line on the vertical axis in the below graph. This indicates a netting of activity at times based upon market conditions and localized events.

Below we have charted the five-year average for a weekly change over the course of a year for the salt facilities as well as the East Region – which is comprised by lower turn facilities such as depleted fields and aquifers.

EIA 5-Year Average Weekly Delta to Working Gas Levels by Region/Class

The item of note is the tendency for salt to hit an additional withdrawal phase during what is prospectively the warmest period of the summer time as electric generation peaking facilities demand levels increase.

Now moving into this year and comparing the current rate of salt injections for the first eight weeks beginning since mid-March shows that through this period, 2015 is outpacing the historic average by almost three times. This eight week period has salt increasing by 115 Bcf or more than one-third of the entire capacity compared with an average of 44 Bcf for the five year benchmark.

The chart below displays the difference for that aforementioned period as well as the next two months or until Salt hits the mid-year withdrawal phase. If it continues at its current pace, you can expect another 117 Bcf to be added to the Salt coffers by the middle of July. Doing so could place Salt storage levels at 340 Bcf which is at the brink of year-end Salt storage capacity. This mark would be in excess of the EIA reported peak for Salt capacity for the middle of July by more than 23 percent.

2015 Salt Injections Outpace the 5-Year Average Nearly 3X

The market has set the table for the likely probability of salt storage approaching capacity in the near term. However, we have not even addressed the fact that soon several additional pipelines will commence either backhaul or reversal projects within the region such as REX, ANR and NGPL. These projects presumably will bring on additional production as well as influence economic arbitrage incentives to move current constrained gas to more lucrative markets in the gulf region.

One of the underlying fundamental reasons for the build out of each of these reverse flow projects is the anticipation of additional demand from LNG exports which are still several months to years away from completion. Inevitably we believe that the timing of the current state of Salt storage along with a potential late start to summer and new or displaced molecules arriving to the region may put Salt capacity in dire straits before the summer is out.

PointLogic also anticipates both basis and NYMEX spread upheaval in the financial markets. Last June, July and August, Henry Hub held a premium to most markets including significant premiums to pricing points in the Northeast. One can expect perhaps a similar set-up moving through the month of May especially when you look at the cash markets this past week (May 11-13), which has had the futures benchmark trading above June on occasion. If the salt cavern premise laid out above comes to fruition, a dramatic change could be on the horizon. Regarding NYMEX, one can expect to see the shape of the curve begin to perhaps earn back the storage carry premiums that capacity holders have longed for once again. Specifically in the low risk added value front, PointLogic anticipates that the August/September spread may be looking more risky than the October/January spread.

Many market players enjoy this type of volatility, while many others do not. PointLogic only hopes to inform the market and learn from these events as they take place. The developments in salt storage injections over the course of this summer will prove to be a tremendously interesting aspect of the market to observe. How capacity holders and the market reacts is yet to be seen.

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