Analysis:Players in the Canadian gas scene will soon have more storage capacity to use, giving producers, sellers, and buyers more options to profit from (or mitigate) the ongoing seasonality effect in North American gas prices.
EnCana Corp., the gas powerhouse formed earlier this year by the merger of Alberta Energy and PanCanadian Petroleum, is spending C$130 million to build a 40 billion cubic feet (bcf) storage facility at Countess, Alberta.
The site, located 53 miles (85 kilometers) east of Calgary, will be operated in conjunction with 10 bcf of storage at Hythe in northwestern Alberta and 85 bcf of storage at Suffield in southern Alberta. The latter is located near the conjunction of Alberta's intraprovincial pipeline system with TransCanada PipeLines' international network. The hub, known as AECO, acts as a major pricing point for Western Canada.
Using two depleted reservoirs, the Countess facility will be designed for peak injections of 950 million cubic feet per day (mmcf/d) and withdrawals of 1.25 bcf/d.
EnCana says the first 10 bcf of storage will be on the market in the second quarter of 2003. Full capacity of 40 bcf is expected to be available by April 2005.
The main beneficiary of the Countess site will be EnCana, where the project will expand its storage capacity in Western Canada by about 40 percent to 135 bcf. As operator, the company will collect fees from third parties for injections and withdrawals regardless of whether gas prices rise, fall, or hold steady.
EnCana (through predecessor Alberta Energy) has steadily been increasing its presence in this niche. After opening AECO in 1988, it created the Wild Goose site in northern California in 1998. State regulators recently approved an expansion of Wild Goose, which will more than double in size to 29 bcf of capacity by April 2004.
Besides market intelligence, the company uses storage for physical hedging and to profit from volatile prices. For example, high prices in the first quarter of 2001 resulted in gas storage accounting for almost 25 percent of Alberta Energy's cash flow in that period.
Some people might argue the North American gas industry does not need more storage, pointing to new or refurbished LNG facilities in the U.S. (potentially adding up to 2 bcf/d) as evidence of incremental supply sufficient to meet peak demand.
In addition, increased demand next year from economic recovery plus more normal storage inventories are expected to boost U.S. domestic gas supply by 2.8 percent in 2003, according to a recent forecast by the Energy Information Administration,
But, as was dramatically illustrated in Alberta a few months ago, forecasts of increased production and additional foreign supplies do not take away the need for more storage capacity in North America.
In late July, prices at AECO tumbled to under C$2 per mmBtu as a result of lackluster demand, high linepack (gas used to balance operations) on TransCanada's system, and most producers' refusal to reduce output.
The basis differential between the New York Mercantile Exchange and the Alberta hub, normally around the 75 Canadian cents per mmBtu (about equal to the cost of transportation), widened to more than C$3 per mmBtu.
If Countess had been running, more people could have taken advantage of the arbitrage opportunity to buy cheap spot gas, dump it into storage and pull it out a couple of months later for a near doubling of their money.
In its October forecast, the EIA predicted gas prices this winter would average $3.34 at the wellhead, up nearly 50 cents from the expected average of $2.83 for all of 2002.
The spread gives gas buyers and sellers incentive to play the storage game, hence creating opportunity for companies like EnCana.
If anything, more storage is needed to help smooth out some of the fluctuations in prices. These gyrations make some companies, say the owners of aging coal-fired power plants, reluctant to switch to such a volatile commodity.
With Arctic gas development, from both Canada and Alaska, looming on the horizon, expect storage to grow since upsets at the remote fields would throw supply-demand fundamentals badly out of balance. The long-term prospects for EnCana's strategy look pretty good.
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