US marketers struggle to secure gas storage as LNG demand extends contract terms

Booming demand from US LNG terminals is driving up prices and contract lengths for natural gas storage, squeezing out marketers.

In the first storage "supercycle," demand came from "from marketers and traders taking advantage of intrinsic and extrinsic value," said Amol Wayangankar, founder of Enkon Energy Advisors, Feb. 18 at the Enkon natural gas storage forum in Houston.

"What we are seeing this on this cycle is significantly different," Wayangankar said. "End-users and operational customers are driving the need for storage. I don't think an LNG terminal really runs spread option models to figure out how much they want to pay for storage."

LNG terminals and power stations are also willing to sign contracts for longer terms than marketers. Three years used to be considered a long-term contract for storage, but "today, if you look at all the open seasons, the minimum is five years and I bet a lot of these open seasons end up with about eight to 10 years of weighted average contracts," Wayangankar said.

While prices are also on the rise, lengthening terms are more problematic for marketers, said Mark Wilson, a vice president at Kinder Morgan.

"What the marketers fear is term more than price," Wilson said. "They can run a storage volatility model, figure out the intrinsic and the extrinsic value and compete competitively for a one-year contract, or maybe even a two-year contract. But I haven't seen the marketers willing to take a flyer on a five-year contact."

Even if a marketer can make a competitive bid for shorter-term contracts, storage developers need to balance this against the security of longer contracts.

The average contract length for Caliche's Golden Triangle Storage is over eight years, CEO Dave Marchese said. "We hope to keep that in the seven to eight range." That leaves some room to include shorter contracts with marketers. "The trading shops that are saying 'look, I can only do a two or three-year contract.' We can balance that with a longer one, and look at an average tenor. Hopefully that average tenor is longer than the average debt."

LNG strategies

LNG is a key part of storage demand growth, but strategies vary widely among LNG terminal operators, with some opting against buying any storage at all.

For most LNG operators with gas storage, "it's more about optimization than necessarily dealing with a plant trip," Wilson said. "When a plant trips there's just so much gas that floods the market."

For example, Cheniere "has gone out and bought what I would call normal salt storage," Wilson said. Its injection ratios are around 25,000 MMBtu/d per Bcf and around double that for withdrawal, based on publicly available index of customer data, he said.

Golden Pass is an exception to this rule; it has a contract with 700,000 MMBtu/d of injection capacity, according to Index of Customers data, enough to deal with a plant trip, Wilson said.

Kinder Morgan is not the storage operator in either example, a spokesperson clarified Feb. 19. "For further context, Cheniere purchased 8 Bcf, so it has 200,000 MMBtu/d injection whereas Golden Pass purchased 13 Bcf for 700,000 MMBtu/d injection."

On the other hand, operators including Venture Global, have not bought any storage, which is "understandable," Wilson said. "Rather than pay a reservation charge for 365 days, they'd rather just take a loss on the day in the gas market and sell at a low price to the people that do own the storage."

Venture Global's terminal design, which consists of 18 mini trains, "probably also played a part in their strategy of how they want to deal with upsets," Wayangankar said.

Securing enough storage to insure against a plant trip comes at a cost.

"Some of those numbers out on the IOCs are 8 Bcf here, 13 Bcf there, that's about 15 to 30 million [dollars] a year," Wilson said. "It's almost a shame to just sit on that waiting for your plant to trip."

Operators with this level of storage may seek to optimize it, Wilson said.

"You've got a catch-22 there; if you're optimizing your storage, then it's not available to trip. So I think the industry is still working through that."