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Salt of the Earth Concerns – Storage Balancing Act in the Producing Region

July 1, 2015 | By Jack Weixel

Salt Dome CavernsThis week’s edition of Get the Point expands on an analysis done in early May, when PointLogic Energy began to notice the rapid fill rates of natural gas storage inventory in salt dome formations in the Energy Information Administration’s (EIA) Producing region. Since that time, salt dome (or “salt”) storage has continued to see large injections through the third week in June begging the questions: When will these facilities fill up? And how will the producing region balance injections and withdrawals over the course of summer 2015 in the current supply and demand environment?

Salt dome storage has unique characteristics that increase its extrinsic value to operators and market participants. These include low base gas injection needs (the amount of cushion gas needed to support working gas operations) and the ability to turn, or cycle, gas multiple times per year. Its flexibility in this regard is a major reason why it is one of the only types of underground natural gas storage being actively pursued for development in today’s natural gas market. The illustration below from the EIA shows the development of salt storage versus other types over the past six years, including additions to working gas storage capacity. By 2020, salt storage capacity could increase by 189 Bcf , assuming all 21 projects and expansions currently being tracked by PointLogic Energy’s Storage Informant database come to fruition.  

Demonstrated maximum working gas volume

Weekly injection data for salt facilities shows an excessive amount of gas flowing to these facilities this summer. Since the week ending March 20, 2015 injections into these facilities have averaged 13.4 billion cubic feet (Bcf) per week. This compares to an average injection of only 10.4 Bcf per week for the first 12 weeks of summer 2014.

Weekly Injections/Withdrawals -- Salt Caverns

The rush to fill salt cavern storage has resulted in a scenario where it may not be an available option to store gas any longer as the summer wears on. Current salt storage inventories stand at 295 Bcf as of the week ending June 19, 2015. With demonstrated maximum working gas storage volume listed by the EIA at 412 Bcf, this means that salt storage is nearly 75% full, only 12 weeks into a 30 week injection season. The area graph below shows this in detail.

Salt Cavern Storage Inventories

Salt storage inventories have not been this high since the week ending January 9, 2015 (291 Bcf). This inventory glut was slowly depleted over the course of the next few months to serve winter demand. Salt inventories have not been this high during a summer injection season ever. During previous summer injection seasons, the highest level of gas that had been stored in salt facilities was 267 Bcf for the week ending June 22, 2012. Coincidentally or not, the summer of 2012 was also the last time that natural gas prices consistently failed to breach the $3.00 per MMBtu mark.

So, what is going on here? Certainly the nature of salt storage and its ability to respond to market conditions has something to do with it. To investigate further, let’s examine a summer season in the historical record that has many of the same attributes as this summer. As the old idiom goes, past performance does not guarantee future results, but using a historical period of time as a reference case can be useful to assess similar patterns and highlight factors that may be different in the current time frame. The graph below plots Henry Hub prices and weekly injection/withdrawal rates over the course of the summer of 2012.

Weekly Injections/Withdrawals -- Salt Caverns

As the price of natural gas at Henry Hub began to crawl its way out of the basement in the summer of 2012, activity at salt facilities was primarily composed of heavy withdrawals during the peak power burn period of June, July and August -- in response to higher regional natural gas-fired power demand (as discussed here) in the Southeast U.S. High power burn was primarily a result of low prices due to the warmest winter in recorded history that left storage inventories at record levels entering the summer of 2012. During the second week of September 2012, injections into salt facilities began in earnest as power burn demand eased with declining temperatures.

There are some similarities between summer 2015 and summer 2012, most notably the instance of high power burn in a low price environment. Through the end of June, power burn has averaged 24.8 Bcf per day (Bcf/d) during the summer injection season starting April 1, which although a distant second place to 2012’s record breaking 26.6 Bcf/d level through the same time period, is significantly higher than the 5 year average of 21.5 Bcf/d. For June 2015 specifically, power burn has averaged 29.4 Bcf/d and thanks to a recent heat wave, is equal to June 2012 levels. July 2015 would need to top 35 Bcf/d to surpass the record set in July 2012. The PointLogic forward forecast (based on weather data) indicates that July 2015 power burn will average around 34 Bcf/d.

There are also some important differences in the two summers, including how much gas is available to the market and from what sources. Compared to the summer of 2012, the gas market in 2015 has an embarrassment of riches in the field; with production averaging just 64.7 Bcf/d from April to June 2012, compared to 72.3 Bcf/d this year (a difference of 7.6 Bcf/d).

Another difference between the two periods concerns accessibility of gas. In the summer of 2012, consumers of gas could source the fuel from overfilled storage coffers with little concern over inventory levels. In the summer of 2015, consumers of gas can source the fuel from overfilled pipelines connected right to producers in the field. In fact so much extra production gas is available that the market is concerned about end of season storage inventories breaching the 4.0 trillion cubic feet (Tcf) mark for the first time in history. Thus far, summer 2015 injections at salt facilities certainly reflect this sentiment.

So, will injections or withdrawals from salt storage facilities prevail for the rest of summer? And to what extent will salt storage flexibility relieve inventory pressures in the producing region?

The week ending June 19, 2015 showed a net zero change in inventory for salt facilities in the producing region. This was the first week in fourteen weeks without an injection going back to the week ending March 13, 2015 (which also recorded a net zero change in inventory). The indication of a slowdown in salt injections is evident as the market enters its highest period of demand during the months of July and early August.

Power Burn Southeast U.S.Using summer of 2012 as a parallel from a demand perspective shows that in addition to withdrawals from salt facilities, non-salt facilities in the producing region also stopped injecting gas due to elevated power demand in the greater Southeast.  In the summer of 2015 to date, producing region non-salt facilities have continued to inject. Power burn, on a regional basis, is lower in the Southeast U.S. for the month of June 2015 versus June 2012 by nearly 1.1 Bcf/d. And with more supply to deal with both in the region and for the U.S. as a whole, the Southeast will likely remain long gas for the duration of summer.

Producing Region Non-Salt injectionsThis suggests that the market can slow down injections into salt facilities due to its flexible nature. But this does not bode well for producing region non-salt injections, which may have to take on more and more gas over the course of the next two months. Injections into producing region non-salt facilities have been steady and have outpaced injections of summer 2012 to date by an average of 15 Bcf per week (2.1 Bcf/d).  

The difference between the two periods of time is due not only to higher power demand in the peak months of 2012, but also because of high non-salt producing region inventory levels that summer overall. EIA states that maximum working gas volumes (operational capacity) in the region are just shy of 1.1 Tcf. In the summer of 2012, non-salt inventory levels hit 862 Bcf. As of the week ending June 19, 2015, non-salt producing inventories stand at 722 Bcf. This allows the producing region much more wiggle room to absorb gas that may not be injected into salt facilities.

Assuming that salt storage has little to no net injections over the next 10 weeks through the end of August, inventories would stay around 295 Bcf (5 year average injections confirm this level of net activity). In order to adequately forecast an end of summer storage level, several assumptions must be made. Not only is the availability of production gas higher, but as we’ve made note of in past editions of Get the Point the U.S. is experiencing a demand renaissance of sorts. The result of this for storage injections should be a net wash comparable to summer 2014 injections levels (assuming neutral weather), meaning more gas will be burned, especially in the greater Southeast region, which is not only experiencing higher overall levels of demand, but also pressure from the Northeast to ship less gas due to production gains in the Utica and other formations in the region. To keep things simple, the assumption in the below graph assumes that summer 2014 injection levels hold for non-salt producing region facilities and that salt facilities begin injecting at summer 2014 levels in September. 

Producing Region Storage Inventories

The results of the above scenario indicate an end of season producing region storage inventory just shy of capacity levels, with inventories ending at 1.45 Tcf, just shy of the combined salt and non-salt capacity level of 1.48 Tcf. A tight squeeze, but one that could be played out in overall U.S. storage inventories as well. This scenario also fairs well for consumers of natural gas, who see ample storage inventory as their friend. With the majority of industrial, power, and export demand growing in the greater Southeast region of the U.S., the producing region will have adequate storage gas, perhaps even too much, to handle increased demand this summer. If U.S. production rates pick up in late 2015 and storage is bursting at its seams, what happens if the producing region chooses to defer a sizeable portion of winter withdrawals? What kind of fallout would take place if the peaks and valleys of storage compress? Stay tuned as we explore these topics and more in future postings.

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