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Change is Good: An Early Preview of New Gas Market Storage Regions

August 5, 2015 | By Jack Weixel

Over the next three months, the most important fundamental factor that determines the price of natural gas will undergo a major transformation.  The Energy Information Administration (EIA) is preparing to make significant revisions to its Weekly Underground Natural Gas Storage Report by the traditional start of winter withdrawal season on or about November 1st.  The EIA will begin reporting weekly storage inventory data and change in inventory in five new reclassified regions of the lower 48 United States.  Previously, the EIA reported weekly data in only three regions.  

Source: Energy Information Administration (EIA)

This change is the most significant disaggregation of weekly storage data since the EIA began reporting Salt Dome storage inventory in the Producing region in January of 2013. That change served to enhance market transparency while maintaining storage operator confidentiality.  It also allowed storage forecasters and market participants alike to better anticipate weekly storage change estimates and provided better transparency regarding the price direction of natural gas spot and prompt month price forecasts. 

It’s been a little more than a year since EIA began hinting at the regional change, receiving approval to modify the way storage survey respondents report in late 2014.  Specifically, storage operators that traditionally would report field volumes by East, Producing and West regions will now have to report inventory data spread out over five new regions. 

The new East region has been reduced in size and now excludes states west of Ohio, Virginia and North Carolina.  A new Midwest region has been created that includes States that used to be part of the East, adds Minnesota and drops Nebraska (wholly out of place to begin with).  The new South Central region remains largely unchanged from the old Producing region, but drops New Mexico, which moves into the Mountain region.  The Mountain region also gains Nebraska, but is separate from the newly formed Pacific region, which is made up of California, Oregon and Washington.  

EIA has revised its Form 912 for weekly respondents and has been collecting historical information for the five new regions, which is due out by the end of this month.  In an excellent blog post last month, our friends at RBN Energy detailed the additional transparency that would come out of this regional change.  Visibility into available storage capacity using pipeline EBB data to estimate weekly storage levels increases in the new East, the South Central and in the Pacific region.  Visibility problems are still evident in the new Midwest and Mountain regions, primarily due to storage gas trapped behind local distribution company (LDC) or utility systems, which is not viewable in scraped pipeline flow data from interstate pipelines (EBB data).   

PointLogic Energy has prepared some preliminary estimates of both inventory and flow in these new storage regions that is detailed below.  These estimates come from a different, and slightly dated, source - EIA Form 913 State level data, which has been organized by State to fit into the new regions.  EIA 913 storage data is in arrears by two months.  Data released on July 31, 2015 runs through the month of May 2015.  However, 913 data is significantly more comprehensive and reports total inventory levels by State for all 395+ storage facilities in the U.S.  Weekly inventory data is estimated based on a smaller subset of survey respondents.

The exact date is unknown, but sometime in August the EIA will begin reporting weekly inventory data in both the three and the new five region breakout.  What followers of the weekly storage number are waiting on the edge their seat for is the chance to view all the historical data reorganized into the new reporting regions.  This will prompt a rush of energy participants to digest the new data and recalibrate their storage models.  Additional fine tuning is to be expected in the weeks to follow as storage prognosticators perfect their modeling techniques.

From the chart below, PointLogic assembled state data from California, Oregon and Washington to chart inventory levels for the Pacific region going back to 2009.  Working Gas design capacity is estimated for each region using EIA field level data.  PointLogic has taken this one step further by looking at each State’s maximum working gas level achieved since 2009, represented by the black dotted line.  It’s important to note that EIA calculates a different number for maximum working gas volumes by facility, which equals 4,336 Bcf for the lower 48 as a whole.  Disaggregating this number by State is difficult due to a few large interstate pipelines that have various storage fields located on different parts of their system, which might be in different states, but report one system-wide storage number.  Part of the art of storage forecasting is deciding how to split up EBB posting data for system storage injections and withdrawals that cross these boundaries. 

Source: PointLogic Energy and EIA

For the Pacific region specifically, we see that after several modest winter withdrawal seasons in 2011/2012 and 2012/2013, a large drawdown occurs in winter 2013/2014, representative of the impact that the coldest winter in 60 years had on the entire U.S.  Through the end of May, EIA State inventory data shows that Pacific region is holding 322 Bcf of gas in storage, nearly  83% of max working gas levels.  For the remainder of injection season in 2015, PointLogic believes that the rate of gas injections in the Pacific region could slow down due to the increased usage of natural gas fired power generation—a result of weak hydropower output from the severe drought. 

Using the same treatment for new EIA regions moving west to east, the Mountain region stands out for a few reasons.  Mountain inventory levels have never exceeded 250 Bcf over the historical time frame, but design capacity of the States in those regions is 464 Bcf.  Maximum working gas volumes by State is a more reasonable 270 Bcf which is due to the fact that a few fields exist in the Mountain region that do not have adequate withdrawal capacity compared to their injection capacity (i.e. you can put the gas in, but you’ll never get it back out).  As of May, working gas inventory stands at 135 Bcf, half of historical max working gas levels.  

Source: PointLogic Energy and EIA

In the Midwest region, we see a historical pattern from the summer of 2009 through the summer of 2012 where storage was effectively filled to maximum working gas volume each injection season.  In the summer of 2013, this dynamic changed, perhaps because gas buyers in the region realized that gas from the Northeast was plentiful and began displacing inflows from the Northeast, which meant more gas supply certainty to the region outside of traditional storage facilities.  Through May, injections into the eight states in the region that have underground storage facilities totals only 438 Bcf, under 40% of max working gas levels.  

Source: PointLogic Energy and EIA

In the South Central, there is generally more variability in summer and winter seasons due to the concentration of flexible Salt dome facilities in the region.  The EIA plans to continue to break out Salt and Non-Salt facilities in the new reporting structure.  From the graph below, the region was clearly hard hit in the winter of 2013/2014 and has yet to rebound fully to peak inventory levels of over 1,200 Bcf.  As PointLogic has examined previously (see Salt of the Earth Concerns), the region is on a trajectory to show substantial builds this summer and has 920 Bcf in the ground through May, 71% of max working gas levels. 

 Source: PointLogic Energy and EIA

The East region has 455 Bcf of gas in working gas inventory as of May, a number similar to reserves it held in May 2013 and is ahead of the game compared to May 2014 levels (350 Bcf).  With the tremendous amount of production occurring in the region, the East can expect to come near its historical max working gas level of 972 Bcf by the end of injection season.    

Source: PointLogic Energy and EIA

With Lower 48 inventory standing at 2,880 Bcf as of the week ending July 23 and injections pushing inventory levels above 3,100 Bcf by the week ending August 21, how will fill rates in these new regions play out?  Which regions are expected to keep pace with injections and which are the most at risk to feel the squeeze of max working gas levels, thus keeping price low in the region? 

Because EIA 913 data is in arrears by two months, some extrapolation is necessary.  The graph below represents total lower 48 inventory data extrapolated out using weekly injections through the end of July.  PointLogic assumes that injections for the week ending July 31 will equal 42 Bcf, putting inventory levels at 2,926 Bcf as of last week.  

 Source: PointLogic Energy and EIA

As is evident, the lower 48 is in no danger of reaching State level design capacity of 4,727 Bcf, but could still be on pace to reach the maximum State level working gas volumes just above 4,000 Bcf, as many storage prognosticators have predicted for this summer’s injection season.  

Given the new storage regions, how will the rest of this summer pan out?   By utilizing the five year average injection rates by month, we can deduce where inventories may be headed.  In the graph below we total the five year average additions to inventory by new EIA region.  As represented by the blue bars, the Midwest and East clearly have the highest late injection season totals, at 586 Bcf and 433 Bcf respectively. 

Source: PointLogic Energy and EIA

If the Pacific region were to inject 87 Bcf from June through October, inventory would exceed max working gas volumes there by 20 Bcf.  So, the region can effectively afford to slow down injections in the face of a weak hydro year and drought conditions in California and spark additional gas-fired power generation.  However, this analysis begs the question as to whether five year average injection rates are realistic.

Given the ever changing dynamics in the natural gas market – with production rising faster than demand in recent years, a similar chart using the last three years average additions to inventory might be more representative. 

 

Source: PointLogic Energy and EIA

In this analysis, the Pacific region is still clearly in trouble, but more significantly, the Midwest, South Central, and East regions also are pinched using the three year average builds to inventory levels.  Under this scenario, total storage at the end of October for the lower 48 would equal 4,306 Bcf, just 30 Bcf shy of EIA’s facility level maximum working gas volumes figure of 4,336 Bcf. 

With higher gas production in the East and more pipeline capacity opening up to the Midwest (see Escape From the Northeast is About to Get Easier), the interplay between these two regions will be key.  The South Central region is expected to lose deliverability capacity into both the East and Midwest (either by continued displacement or pipeline expansion), this region will also be squeezed as the market spirals into prime injection season through the latter half of August, September and October. 

Later in the month of August, the market will receive more clarity on inventory levels in these respective regions, with five years of weekly inventory history being released by the EIA.  Until then, stay tuned to PointLogic Energy as we dive into regional supply and demand dynamics for these new EIA regions in future additions of Get the Point.

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