Gas Storage Nears Capacity as Stockpiles Rise

U.S. capacity to store natural gas may get its first real test this year as excess production, slumping demand and increased imports of liquefied gas combine to push storage fields to their limits.

That points to even more pressure on prices, which are now at about a third of last year's level due to the recession.

"We may get to the point where there's no place to put gas," said Ron Denhardt at Strategic Energy & Economic Research, a Massachusetts-based consulting firm.

"(Producers) are either going to be forced to shut in or prices will fall enough that they voluntarily shut in," he said. "I think we'll see a mix of both."

After ending winter at their second highest level ever, gas inventories—or supplies pumped underground from April through October to help meet winter heating needs—have grown at a record pace so far this stock building season.

Total stockpiles stand at 2.443 trillion cubic feet, a record for this time of year, and if inventory builds continue at the current rate, stocks could top 4 tcf by November. No one knows for sure if there's enough space to store all that gas.

Even if injections just match the five-year average for the next 20 weeks or so, stocks will hit an all-time high of 3.8 tcf by winter, 7 percent above the previous record in October 2007 and a volume some consider to be the limit.

"There's certainly a number of analysts who believe we will be pressing hard on the system. We think there's going to be a new record (high in storage), but it may not necessarily push on the peak number," said Bill Trapmann, industry economist at the U.S. Energy Information Administration.

EIA said the U.S. inventory build in May alone totaled 465 billion cubic feet, the largest for that month since it records were first kept in 1976.

Trapmann said EIA pegs peak capacity at just under 3.8 tcf, but the theoretical total design capacity of all existing U.S. storage fields, less base gas, is probably closer to 4.2 tcf.

Base, or cushion, gas is the volume of gas used as permanent inventory in order to maintain adequate pressure and deliverability rates in storage reservoirs.

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In practice, not every field can get filled to capacity because some are abandoned or unused and some are held in reserve by pipelines to meet unexpected demand, Trapmann said.

The situation is the same in Canada, the largest foreign gas supplier to the United States, where storage facilities are already about 60 percent full, just over two months into the seven-month injection season.

How to Balance

Gas prices peaked last July above $13 per million British thermal units but have been in a steady decline ever since as near-record gas production and a deepening recession that slashed demand created a glut.

Gas drilling has fallen sharply this year, but consumption has dropped even faster, keeping the supply-demand balance loose and driving prices to a 6-1/2-year low near $3.20 in April before bouncing back recently to the $4 level.

EIA sees supplies dropping 1.1 percent this year, but consumption is expected to fall 2.2 percent, with the bulk of the decline coming from an 8 percent drop in industrial demand, which accounts for nearly a third of total use.

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Of course, a rapid economic recovery could boost demand, but few analysts expect that to happen this year.

Rising liquefied gas imports have only added to the surplus, and that may force producers to shut in productive wells later this summer as they struggle to market their gas.

"If this storage trend continues, there's going to be a substantial amount of surplus gas that has to be removed from the system," said Darren Horowitz at Raymond James in Houston.

Barring any supply disruptions from hurricanes or other disasters, the only other way to balance the market is through price. If prices get low enough, gas will gain market share against traditionally cheaper coal.

Horowitz said as much as 500 bcf of gas may need to be removed this season to get the market back to equilibrium. As that happens, prices could sink to $2.50 per mmBtu, he said.

"The only rationalizing mechanism that we think can bring the equation back in balance is price. That's why we're still expecting a gas price collapse, probably in the third quarter," Horowitz said.

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