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California red tape hampers gas storage expansion

A proposal to double the size and triple the withdrawal capacity of a natural gas storage facility in energy-starved California is being hampered by regulatory delays, the president of an independent Canadian storage firm said Friday.

“Under normal regulatory processes in California, we don’t expect to have that expanded capacity on until April 2004. Most of that is regulatory, not construction time,” said Rick Daniel, president of AEC Storage and Hub Services Inc., which operates the Wild Goose Storage Inc. facility near Gridley, Calif. AEC is exploring “the possibility that we can shorten that time frame to have the additional capacity on in 2003,” he said.

AEC wants to increase the working gas capacity of that facility to 29 bcf from 14 bcf. It also would hike its withdrawal capacity to 700 MMcfd from 200 MMcfd and its injection capacity to 450 MMcfd from 80 MMcfd (OGJ Online, June 20, 2001).

“There’s obviously a need for more storage capacity in California. But it takes a long time from the point of deciding you’d like to develop storage in a particular region to finding a good reservoir or salt cavern to develop, and then go through the regulatory process,” said Daniel at a gas storage conference in Houston, sponsored by Ziff Energy Group.

AEC is a unit of Alberta Energy Co. Ltd., the largest producer of Canadian natural gas.

Independents account for only 13%, or 559 bcf working gas volume, of total North American natural gas storage capacity. That compares to 48% of the market, 2.1 tcf, operated by federally regulated interstate pipelines; or 39%, 1.7 tcf, operated by state-regulated utilities.

Still AEC claims 22% of that independent sector. It’s Wild Goose operation is the only independent gas storage facility licensed in California, Daniel said.

At that same conference, Blake Herndon, director of risk management described Wild Goose as “precisely the type of storage facility that is needed in California, with the flexibility to meet high-peak demand.”

The natural gas storage industry faces a struggle to develop enough storage capacity to keep up with growing US market demands, said Daniel.

An earlier projection by the National Petroleum Council that US demand for gas will grow by 42% to 31.3 tcf in 2015 from 1998 levels has received much public attention. However, Daniel said, less attention has been focused on the fact peak day demand also is expected to grow 37% to 152 bcfd, while storage capacity is projected to increase only 25% to 4 tcf during the same period.

Difficult to predict
The actual amount of US gas storage that may be needed to supply future peak markets is hard to predict because of possible fuel switching, Daniel acknowledged. Still, he said, the industry certainly will need to add several new gas storage facilities each year to keep up with projected demand.

However, Daniel questioned “whether the storage industry is really well positioned to capture those opportunities. My fear is that some opportunities for storage may be lost to other alternatives such as overbuilding pipeline capacity.”

Most of the storage facilities in North America are owned and operated by utilities and interstate pipelines that may not have sufficient economic incentives to fully optimize their capacity, he said. “I know from talking to utility storage operators that there are opportunities they are not moving on, largely for regulatory reasons,” said Daniel.

“Over-regulation will continue to discourage investors,” he predicted. “Hopefully, we will find ways to move more quickly as an industry to optimize storage capacity,” he said, “but I wouldn’t hold my breath waiting for dramatic change on the regulatory front.”

The gas storage business has seen a fairly steady increase in the value of storage capacity in recent years. “Much of that is driven by changes in the nature of the customer base, and much of it is driven by gas price volatility, especially recently,” Daniel said.

Yet, he said, “We don’t see a lot of new gas storage projects coming on. Instead, the strategic importance of storage seems to have been translated in the recent past into a very high level of mergers and acquisitions as companies scramble to acquire what they view as an important part of the value chain in the future.”

Because natural gas storage is a fairly mature industry in North America, Daniel said, “There aren’t too many opportunities for low-hanging fruit, where you can go into a region and find a very obvious storage development opportunity at low cost that can easily be brought on.”

Instead, he said, “Storage development is increasingly becoming very much a technology play, where you’ve got to find the best quality reservoir and have optimum development to make it economic.”

Meanwhile, the industry is missing an opportunity in the redevelopment of existing storage, Daniel said. “There’s probably an awfully lot of additional capacity that the industry can get out of existing facilities by applying our expertise,” he said.