Is natural gas storage viable in Cook Inlet?

Kristen Nelson

Petroleum News Editor-in-Chief

Why spend money putting natural gas back into the ground? That was the question Kent Hampton of Marathon Oil addressed in a Nov. 16 presentation to the International Association of Energy Economists in Anchorage.

Storage allows you to meet winter needs, Hampton said, and still allow fields to produce at “their natural, most efficient and most economic rate.” If Southcentral Alaska gets a spur natural gas pipeline from the North Slope, storage would allow that spur line to be used year around, “avoid over sizing the pipeline” to meet peak needs for the coldest days of the year and ensure deliverability.

Hampton is Marathon’s marketing manager for North American natural gas, and is on special assignment to the company’s Alaska gas operations. An economist by training, Hampton has been marketing natural gas for 22 years, and he shared his insights — which he said did not necessarily represent the views of Marathon — about whether natural gas storage is feasible in Cook Inlet.

Winter prices have to be higher

In the Lower 48, Hampton said, the natural gas futures markets “deliberately price winter gas above summer gas” to cover the cost of storage with a differential of about $1 per thousand cubic feet.

Before deregulation, local distribution companies and pipeline companies used to hold most storage capacity, he said, “and producers didn’t have any access to storage whatsoever.” After deregulation storage was unbundled and merchant storage evolved, so customers are no longer forced to take a whole package but can buy storage if they need it.

“Storage is not cheap,” Hampton said: you pay to reserve space in a storage facility, whether you use that space or not, and annual costs range from 40 cents to $3.50 per mcf. There is also a relatively small charge for the compression, with 3-4 percent of the natural gas used for compression fuel.

Because the reservation cost is so high, that makes storage very expensive if you use it only once a year, to meet needs on that cold day in January. If you can use the storage multiple times, however, that capacity payment gets spread out.

Customers for storage are the utilities, the local distribution companies, “but in many instances producers use storage.” For instance, he said, a producer with offshore production in the Gulf of Mexico and a firm commitment to sell natural gas can fill any shortage in deliveries by buying from the spot market, or can keep some gas in storage. “So it’s an insurance policy,” he said, “to guarantee that if you promise firm service to a customer, that you can deliver it.”

Merchant storage is regulated by the Federal Energy Regulatory Commission, and there are open seasons for new projects.

Cook Inlet: a growing storage need

But when wells are shut in, “ultimate recovery from the reservoir suffers and efficiency is often compromised: there’s some hidden costs there.”

When markets are scarce and there is plenty of natural gas, that isn’t a problem, “but when markets get tight and prices get high, then that becomes important.”

Enstar, the local distribution company in Southcentral Alaska, “requires its suppliers to meet its full requirements, that includes not just the base load, but it includes meeting those peaks on a cold day. It’s bundled,” he said.Unocal provides a small amount of storage in the Swanson River field to help with peak winter needs and industrial users on the Kenai Peninsula have to curtain operations on cold winter days so that Enstar has all of the gas it needs. “It comes at a cost: it’s not free,” Hampton said.

What would make a good storage project?

In addition to knowing where the wells are, he said, you also need to know the performance characteristics of the reservoir.

And, like real estate, he said: location is everything: storage needs to be close to markets, connected to pipelines and in a place that’s accessible.

Hampton said he’s been asked about refurbishing a liquefied natural gas plant. The Nikiski LNG plant is in good shape, still producing LNG, he said, but even if it were available for gas storage, the volume of LNG the plant produces is “way oversized for what we would need” for Cook Inlet.

And it lacks regasification facilities. LNG will return to normal temperature — and a gaseous state — by itself, he said, “but probably not fast enough to do what you want to do, which is peak shave,” to meet peaks of need on very cold days, Hampton said, although it does have location: it’s on the pipeline system and close to the peninsula’s industrial hub.

Complications in establishing storage

There are also ownership issues. You frequently have multiple working interest owners in a gas field, and to change from production to gas storage you have to get all of the working interest owners to sign off.

Then there is the issue of base gas: how do leaseholders get value for remaining base gas if a producing reservoir is converted to storage? And in addition to any remaining gas, some gas will probably have to be put into the reservoir to provide the base, or cushion. “It never comes out,” Hampton said. It provides needed pressure so that storage gas can be produced when needed.

Then there is a royalty issue: royalty is normally paid when gas is severed from the lease, he said. If you put more gas into the reservoir, when you take gas out, he asked, “does the state get a second tranche of royalty payments?”

Reliability is a huge issue for Cook Inlet, Hampton said, because Alaska isn’t on the national gas grid, “so we have to have some redundancy and we have to have backups.”

He said he thinks a spur line will be built from the North Slope. “I think the storage, whatever it is, needs to be integrated in with the design of the spur line.” The spur line could fill storage in summer and run the base load in the winter, he said. “If you oversize that line” for winter peak needs, and only use a 30 or 40 percent of the capacity most of the year, the tariff will be much higher.

And, with storage, you also have backup during pipeline outages.

Role of coal?

So if coal power is the base of your energy, wind power is added in when available, and gas “can very nicely serve a swing market by going up and down,” Hampton said. “… You can very quickly get a gas turbine up to speed and online” when extra power is needed. That means that the gas producer has to have the ability to provide that additional gas to the power generator when it is needed, “so again we come back to the need for gas storage.”

Hampton said he thinks gas storage for Cook Inlet needs to be studied in more detail, but first, he said there has to be an incentive for the producer and perhaps a merchant operator, but also an incentive for the consumer not to burn gas on a cold day, so that some consumers can switch their load.