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Ohhhh noooo..., it’s an OFO! How Pipeline Operational Flow Orders will shape the natural gas glut

Prices may be up a bit, and producers are curtailing some production, but it’s a long way between now and the end of the injection season.  So there is still the distinct possibility that natural gas storage capacity will hit the wall this year, perhaps sometime late summer.  Of course, there are many market factors that may prevent this outcome, including more producer cutbacks, a very hot summer, offshore hurricane damage, etc.  But it could happen.  And that means that we need think about how such a scenario might play out. 

Obviously, storage facilities won’t all hit maximum capacity at the same time.  Some utilities and pipelines will have the honor of reaching capacity early.  Likely one storage region will fill before the other two.  This could have interesting location basis and pipeline transportation consequences as one region feels the full brunt of capacity outage while another acts as an escape valve.  Get your capacity maps out to figure that one out.

But storage capacity statistics won’t tell the whole story.  Some capacity may appear open from the flow data or postings, but be unavailable to customers.   That is because most storage contracts limit injections to a maximum daily rate (the customer can’t put it in all at once).  In addition, certain contracts require ratable fills over the entire injection period.  In other situations, true storage capacity maximums are unknown, at least publically.  All this means that you can’t simply look at storage capacity utilization statistics and determine whether storage capacity is really available. 

So how will we know when we are there?  Will we see Sluggo and Mr. Hands? [1]  No, nothing that obvious.  The most observable signal will be price.  When we see those one-handle numbers for any period of time, that will be a pretty good indication that storage is close to maxed out.  But another equally important leading indicator will be visible through Operational Flow Orders, or OFOs.

OFOs are notices issued by pipelines, LDCs and storage operators [2]. They have been around for decades, but really came into their own when natural gas transportation and sales were unbundled in the late 1980s and early 1990s.  OFOs are issued to protect the operational integrity of the facility. Operational alerts and OFOs can be declared for all sorts of reasons: ruptures, pigging operations and other maintenance, compressor outages, freeze-offs, and other Force Majeure situations.  They can also be issued if the pipeline does not have enough gas and pressures have dropped below operational minimums, or the pipeline has too much gas and pressures are reaching operational maximums.

When an OFO is issued for operational balancing, the pipeline is saying that shippers must carefully match (balance) their inflow with their outflow on a daily basis within a specific tolerance.  This means what goes in must equal what goes out.  In the case of pipelines, shippers schedule gas in and out of the pipeline’s system by means of daily nominations.  Let’s say a shipper schedules 10 units in and 10 units out, but actually delivers 12 units in but takes only 10 units out.  That might happen because a production facility exceeded its forecast for output that day.  In such a case, the shipper is then out of balance by 2 units.  Usually the shipper can fix the problem (get back in balance) the next day by simply scheduling 2 additional units out of the system.  But this requires operational flexibility on the part of the pipeline.  If all shippers are facing the same situation at the same time, the pipeline can start to see physical, operational problems on its system.  That is when the pipeline would issue an OFO, restricting the permitted variance between receipts and deliveries.  If the shipper then fails to comply with the OFO, the pipeline can charge a penalty – in effect a fine – for overage or underage.  In certain circumstances, these penalties can be huge.

As you might expect, it is a lot more complicated than that.  To explain how these things will work in a max storage capacity scenario, let’s examine four issues: (a) Firm versus Interruptible Transportation (“IT”).  (b) OFO stages and tolerance bands, (c) LDC versus Pipeline OFOs, and (d) issued OFOs versus warnings & false alarms.

Firm vs. Interruptible

When a pipeline has more gas going in than coming out, the pipeline’s operating pressure increases.  When the pressure starts to approach maximum safe operating limits (a function of its MAOP – maximum allowable operating pressure), the pipeline must take immediate action to correct the situation.  For interruptible shippers, the answer is easy.  The pipeline simply cuts (or allocates) the IT, by notifying shippers on interruptible contracts that the inbound volumes have been curtailed.   In other words, they turn off the valve.  In the case of firm shippers, the pipeline is required to have transportation available unless there is a Force Majeure situation (mechanical problem or other operating issue).  Thus when a pipeline issues an OFO for a high pressure situation to firm shippers, it does not require that the shipper decrease or stop deliveries, it only means that the shipper must get deliveries and receipts into balance.

OFO stages and tolerance bands

All OFOs are not created equally.  Most pipeline tariffs incorporate the concept of stages and tolerance bands.  For example, Pacific Gas and Electric Company's California Gas Transmission tariff permits five OFO stages.  The tolerance bands (how far the shipper can be out of balance) range between 25% down to 5% from Stage 1 to Stage 5.  PG&E’s non-compliance charges are $0.25/Dth for Stage 1, $1/Dth for Stage 2, $5/Dth for Stage 3, and $25/Dth for Stage 4.  In stage 5, the charge is $25/Dth plus the Daily Citygate Index.  For details see PG&E’s OFO Noncompliance Charge Page.  Obviously there is a big difference between a Stage 1 and a Stage 5 OFO in terms of its market impact.  A shipper with an oversupply situation faced with a Stage 5 OFO (a) can sell gas at a very low price (if not pay someone to take the gas) to avoid a $25+index penalty charge, or (b) move the gas a long way – perhaps to another storage region - to avoid that charge. 

Coincidentally there was a Stage 2 high inventory OFO on PG&E yesterday (2/20/2012) - 5% tolerance, $1.00/Dth penalty.

LDC versus Pipeline OFOs

Both LDCs and pipelines issue OFOs, as do storage operators.  There are various regulatory distinctions between the conventions used, but the most fundamental difference between the two types of entities is that the LDC is at “the end of the line”.  While the pipeline can require that inputs equal outputs, the LDC frequently has little control of the outputs (actual usage of end-use customers), and must insist that shippers match that usage within tolerance.   Some LDCs can provide quite a bit of flexibility due to on-system storage maintained for that purpose.  Others with little or no storage flexibility can curtail with little or no warning.   Another difference between pipeline and LDC OFOs are their posting requirements.  Interstate pipelines are required to post OFOs on their websites (EBBs, or electronic bulletin boards) in a relatively standardized format based on rules set by NAESB (North American Energy Standards Board) and promulgated by FERC.  LDCs are regulated by state public utility commissions, and have wide range of posting requirements.  LDC OFOs may not be available on public websites.

Issued OFOs, Warnings and False Alarms

So far this year (1/1/2012 to 2/20/2012) there have been 2,896 notices [3] posted on public websites (bulletin boards).  430 pipeline notices contained the term “OFO”.  361 of these were designated “Critical”.  More than half of that total were from Tennessee Pipeline, which posts several notices each day specifying “Operational Flow Orders (OFO) And Imbalance Warnings – None”.  In other words, a notice that says there are no OFOs.  Postings from other pipelines specify OFOs have been lifted.  Still others warn of potential or impending OFOs without actually issuing an OFO.   The moral to this story is that it is difficult to track and recognize the handful of significant OFOs when they happen.  There are lots of things that get posted that say OFO without being an OFO. And some OFOs are important while others are immaterial.    If you plan to track OFOs yourself, prepare to spend a lot of time either going to individual websites, or using a collection service such as BENTEK’s Flash Notices.  The other alternative is to subscribe to some of the publications that track important notices for you, such as the BENTEK Observer reports.

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[1] For you youngsters, Mr. Hands was responsible for inflicting various indignities on Mr. Bill (“Ohhhh noooooooooooooo...") and his dog Spot over a 30 year period on Saturday Night Live.  Some of the abuse would also come from the evil Sluggo.

[2] In addition to the storage held by shippers to manage winter load requirements and daily swings, storage is held by pipelines and LDCs to manage system imbalances.  Should storage inventories approach maximum capacity, it will likely create OFO situations for pipelines, LDCs and storage facilities.

[3] These figures were derived from BENTEK’s Flash! Notices system, a product which gathers notices throughout the day from all interstate and some intrastate pipelines, LDCs and storage operators.  The system records all notices in a database which can be searched online.  I addition, the system can notify a user via email when various kinds of notices are posted.