Storage has long been a critically important balancing mechanism in the Lower 48 natural gas market. Now, after languishing for much of the Shale Era, storage values are coming out of the doldrums. The key driver behind this change is that, unlike in the old days, when the storage market was driven primarily by the intrinsic value of capacity — i.e., the need to sock away gas in the lower-demand summer months for use in the peak winter months — the value of storage is being driven almost exclusively by extrinsic economics — i.e., how flexible and responsive capacity allows market participants to manage supply and demand during short-term market swings. This flexibility and responsiveness have become increasingly important criteria for ensuring reliability as LNG export facilities and an increasingly renewables-heavy power sector navigate frequent demand fluctuations day to day, or even intraday, as well as during high-stakes, extreme weather events like 2021’s Winter Storm Uri. In today’s RBN blog, we delve into the fundamental shifts influencing today’s storage market.
In Part 1, we began with a history of the various phases of the Lower 48 storage market, including the gas storage heyday, when deregulation and a scarcity mindset led to a big build-out of storage capacity in the late 2000s and early 2010s. That gave way to a Dark Age for storage in the late 2010s when the near-perfection of shale drilling technology and an era of supply abundance left the market with too much storage capacity and depressed storage values. More recently, storage has been making a comeback, but as we concluded in the earlier blog, things are different this time around.
That’s in part because, as a result of the storage overbuild a few years ago, and the location of significant shale supply near large winter load centers, seasonal spreads are still fairly unattractive — at least by the standard set back in storage’s heyday — and there’s very little value associated with storing significant volumes of gas over multiple months, even along the Gulf Coast, where storage demand is climbing. However, it’s also because fundamental shifts in the gas market have created a different kind of storage need — the ability to make high-volume, rapid injections and withdrawals to respond to fast-changing pipeline hydraulic operations and market conditions. In other words, it’s not outright storage capacity (maximum storage quantity, or MSQ) that many of today’s market participants are after. Instead, it’s highly flexible, firm maximum daily injection quantity (MDIQ) and maximum daily withdrawal quantity (MDWQ) entitlements that they’re looking for. Values for flexible injection and withdrawal capacity have climbed as customers are willing to pay premiums for the ability to improve their operational results by better syncing supply with variable, non-ratable demand, while lowering the risk of pipeline imbalance penalties and other costs associated with under- or over-delivering volumes.
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