Underground

Natural Gas
Storage
OGU-08101
Economic Principles in Energy

○ Economics deals with the allocation of scarce

resources to satisfy competing needs.
○ In natural gas storage, economic principles help
determine the best ways to allocate storage
facilities and maximize efficiency.
Key Concepts
–Limited – – The satisfaction
resources (storage, The cost of forgoing the or value derived from using
gas availability) next best alternative
 resources in a certain way
relative to demand. when a choice is made (e.g., the strategic reserve
(e.g., using storage for value of stored gas during
emergency supply vs. high demand periods).
market speculation).
 Scarcity and Opportunity
Cost
●

○ Defined as the limited availability of ○ Opportunity cost refers to the

resources relative to the demand. value of the best alternative that
is foregone when a particular
○ In natural gas storage, scarcity could resource allocation decision is
mean limited storage capacity, made.
infrastructure limitations, or even
gas availability during peak seasons. : Using storage space for
immediate sale vs. holding it for
: Limited storage in winter future price spikes. By choosing
increases prices, as demand immediate sale, the company
outpaces supply. foregoes potential future gains if 4
prices rise.
Utility and Decision-Making
in Energy Storage

○ Utility represents the level of satisfaction or benefit

received from a good or service.
○ In gas storage, utility reflects the strategic value or
economic benefits derived from keeping reserves
(e.g., meeting peak demand or hedging against
price volatility).
5
 :

• Seasonal • Holding gas • Keeping

demand during low reserves for
fluctuations prices to unexpected
(winter vs. sell when supply
summer). prices peak. disruptions.
 Economic Efficiency in Gas Storage

○ Efficiency is achieved when ○ Inefficient storage use

resources are allocated to can lead to higher costs
maximize benefits and and missed
minimize waste or costs. opportunities during
price peaks or shortages.
○ For gas storage, it means using
storage facilities optimally to
benefit from price differences
while maintaining security of
supply.
Supply and Demand in Natural Gas Markets

Introduction to Supply Factors in Demand Factors

Supply and Natural Gas in Natural Gas
Demand Markets Markets

Equilibrium in Price Volatility

Natural Gas and Storage
Markets Needs
8
Introduction to Supply and Demand
Supply refers to the amount Supply and demand
of gas available in the
market, and demand is the dynamics in natural
quantity consumers are gas are influenced by
willing to buy. production levels,
Price is determined by the consumption needs,
intersection of supply and
demand in the market. and seasonality.

Supply and Demand

Basics
 Factor Affecting Supply in
Natural Gas Markets
Storage helps manage Policies may limit production or
supply fluctuations. affect storage methods.

Production Reserves and Infrastructure Environmental

Rates Storage Capacity: Regulations

How much gas is produced Limited transport or storage

impacts market supply. capacity restricts supply flexibility.
 Factor Affecting Demand in
Natural Gas Markets
Industrial Usage Price Influence

• Higher demand • Factories, • As prices rise,

in winter for power demand may
heating; lower generation decrease as
in summer. plants, etc. consumers
seek
alternatives.
Equilibrium in Natural Gas Markets

• The price of quantity of gas supplied =

Quantity demanded.
• Helps stabilize the market. Any disruptions
in supply or demand can cause price shifts.

• Storage facilities often operate to balance

these market changes, storing gas when
supply is high and releasing it during high
demand.
Price Volatility and Storage Needs

● Volatility in Gas Prices:

○ Prices can vary widely due to supply disruptions,
demand spikes, or geopolitical factors.
○ Storage as a Buffer: Reduces volatility by
keeping reserves available, ensuring supply stability.
Cost-Benefit Analysis for Storage
What is Cost-Benefit Analysis
( )

evaluates whether the benefits of a project

outweigh its costs, guiding decisions on resource
allocation.
○ Purpose in Gas Storage: Helps in determining
the financial viability and strategic value of
building or using storage.
 Components of Cost in Gas Storage
(Types of Costs)
Initial infrastructure
Capital investments (storage tanks,
Cost pipelines).
Ongoing upkeep and Expenses related to
operation expenses Types of meeting environmental
Cost regulations.

Mantainance Environment
and al and
Operational Complience
Cost cost
 Components of Benefits in Gas Storage
(Types of Benefits)
Initial infrastructure
Security investments (storage
of Supply tanks, pipelines).
Price Environm
Arbitrage ental
Benefits
Types of
Taking advantage Benefits Expenses related to
of price differences meeting environmental
in the natural gas regulations.
market over time
 CBA Methodology for Storage Projects
(CBA Steps)

Step 2 Step 4
• Identify all • Compare
costs and • Quantify each total costs • Assess risks
• benefits
element and benefits and
(monetary uncertainties
Step 1 value). Step 3

Example: Simple storage project CBA for an

annual cycle.
 CBA Methodology for Storage Projects
(CBA Steps)
Project Overview

•Storage Capacity: 1 million MMBtu

•Storage Cycle Duration: 1 year (inject during summer, withdraw
during winter)
•Injection Price (Summer): $3/MMBtu
•Withdrawal Price (Winter): $5/MMBtu
•Storage Costs:
◦Injection Cost: $0.30/MMBtu
◦Storage Cost: $0.50/MMBtu/year
◦Withdrawal Cost: $0.20/MMBtu
•Other Costs:
◦Operational Costs: $100,000/year

Example: Simple storage project CBA for an annual cycle.

 CBA Methodology for Storage Projects
(CBA Steps)
Cost Breakdown
Gas Purchase Cost:
1 ,000,000 MMBtu × 3 $/MMBtu = 3,000,000$
Injection Cost:
1,000,000 MMBtu × 0.30 $/MMBtu = 300,000$
Storage Cost:
1,000,000 MMBtu × 0.50 $/MMBtu = 500,000 $
Withdrawal Cost:
1,000,000MMBtu×0.20$/MMBtu=200,000$
Operational Costs: 100,000$ Total Costs:
3,000,000 + 300,000 + 500,000 + 200,000 + 100,000 = 4,100,000$
Example: Simple storage project CBA for an annual cycle.
 CBA Methodology for Storage Projects
(CBA Steps)
Revenue Calculation Key Metrics
Withdrawal Revenue:
1,000,000 MMBtu × 5 $/MMBtu =
5,000,000 $

Net Profit (Benefit):

Break-even Price:
Net Profit = Revenue − Total Costs To cover total costs of $4,100,000:
$5,000,000 - 4,100,000 = 900,000

Example: Simple storage project CBA for an annual cycle.

 CBA Methodology for Storage Projects
(CBA Steps)

Interpretation

•The project yields a profit of $900,000 and an ROI of 21.95%.

•If the winter gas price drops below $4.10/MMBtu, the project
would no longer be profitable.

Example: Simple storage project CBA for an annual cycle.

Limitations and Considerations in CBA
(Challenges in CBA)

○ Price Volatility: Unpredictable market prices

can impact profitability.
○ Regulatory Risks: Compliance costs may change
with new policies.
○ Forecasting Difficulties: Demand forecasts may
not be accurate, impacting decision-making.
Discussion Questions

1. How does price volatility impact gas storage strategies?

2. What factors complicate the cost-benefit analysis of a
storage facility?
Economic Drivers: Understanding the economic
factors i

Aim
● Explain how price volatility and seasonal
demand influence natural gas storage.
● Describe the role of underground storage in
balancing natural gas supply.
● Assess the impact of underground storage on
transportation and distribution economics.
Understanding
S.D Patterns Case Study
P.V
 Price Volatility and Storage Profits
(Case Study)

Scenario: Price Volatility in Natural Gas Markets

● Underground Storage Type: Salt cavern storage (ideal for
rapid injection and withdrawal due to its high flexibility).

● Storage Capacity: 2 million MMBtu.

Volatile Market Situation:
v Summer Spot Price (Low): $2.50/MMBtu (low demand).
v Winter Spot Price (High): $6.00/MMBtu (peak heating
demand).
v Sudden Cold Snap (Spikes): $8.50/MMBtu (unanticipated price
surge during extreme cold).
Steps to Generate Profit from Underground Storage During Price Volatility
 Price Volatility and Storage Profits
(Case Study)
Total Profit
● Base Profit (Winter Sale at $6.00/MMBtu): $5,600,000.
● Additional Profit (Spike Sale at $8.50/MMBtu): $3,500,000.
● Total Profit: $9,100,000.

Key Takeaways
● Flexibility in withdrawal during price spikes allows operators to
maximize profits.
● Profitability depends on accurate market analysis and storage
flexibility to respond to rapid price changes.
● Efficient storage facilities (e.g., salt caverns) enable quicker
response during high-price periods, boosting profitability.
 How Underground
Supply-Demand Strategic Importance of
Storage Balances
Imbalances Underground Storage
Supply
 Underground Storage in Balancing Supply
Supply-Demand Strategic Importance of
Imbalances in Natural Gas Underground Storage for
Markets (Impacts) energy security.
● Seasonal variations, demand How Underground ● Provides a strategic
spikes, and unexpected Storage Balances Supply reserve for emergencies, ie.
disruptions can cause (The Mechanism) supply disruptions or
imbalances. Underground ● During periods of excess extreme weather events.
storage acts as a buffer, production or low This helps avoid costly
stabilizing supply during demand, gas is stored. It is market interventions and
peak times and minimizing then withdrawn during ensures continuous energy
supply shortages. high-demand seasons, availability.
helping to avoid sudden
supply shortages and
stabilize market prices.
Transportation Reducing Strategic Importance of
Challenges Transportation Costs Underground Storage
 Transportation Challenges
in Natural Gas Markets
Qn
Describe the transportation infrastructure needed for
natural gas and its challenges ?

• Pipelines and storage facilities are critical for distributing

natural gas. However, high demand during peak times can
strain transportation infrastructure, leading to higher
costs and inefficiencies.
 Transportation Challenges
in Natural Gas Markets
The strain on gas distribution infrastructure refers to the stress or challenges faced by
systems used to transport and deliver natural gas, including pipelines, storage facilities,
and compressors.
● this strain can result from physical stress due to high-pressure gas flow, overcapacity
from increased demand, or aging infrastructure unable to meet modern
requirements.
● Environmental factors like extreme temperatures or natural disasters further
exacerbate the issue,
● Operational challenges such as fluctuating demand and insufficient maintenance
increase risks.
● Additionally, economic pressures and
● Stricter safety regulations can compound the strain, leading to safety risks, service
interruptions, higher maintenance costs, efficiency losses, and environmental harm
from leaks or emissions.
 Role of Underground Storage in Reducing
Transportation Costs
Qn
Explain how underground storage mitigates
transportation costs ?

● By storing gas near demand centers, companies

reduce the need for long-distance transportation
during peak times, lowering pipeline congestion and
operational costs.
 Underground Storage
and Pipeline Optimization
Qn
Discuss how underground storage can optimize the use
of pipeline infrastructure ?

● Storing gas when demand is low allows pipelines to

operate more evenly year-round. This reduces the
need for expensive pipeline expansions and allows for
efficient, stable gas distribution.
Final Thoughts and Q&A

● Reflections on the
importance of
underground gas
storage in today’s
energy landscape.
Pricing Mechanisms and Contracts in Natural Gas Storage

OBJECTIVES

● Identify the different pricing models used in natural gas

storage.
● Explain the distinctions between long-term and short-term
contracts.
● Analyze how regulatory frameworks affect pricing and
contracts.
 Cost- Market- Value-
Pricing
Based Based Based
Models
Pricing Pricing Pricing
Overview of Pricing Models

Importance:

• Pricing models are essential for determining costs to

storage operators and customers, influenced by
market demand, capacity constraints, and storage
service types.
 How is it set?

• Prices are set based on the operational and capital

costs of the storage facility, plus a markup for profit.
Used in regulated markets or for fixed-rate contracts
to ensure predictable returns.
 How is it set?

• Prices are determined by market conditions, such as

supply and demand, peak seasons, and competition.
Common in competitive markets, it allows for price
fluctuations and premium pricing during high-demand
periods.
 How is it set?

• This model sets prices based on the perceived value of

storage services to customers, rather than just operational
costs or market dynamics. Useful for specialized storage
services, such as those close to high-demand areas.
Long-Term vs. Short-Term Contracts
Define long-term Contracts span multiple

Details
contracts and their typical years, providing stability
terms. for both parties. Suitable
for large customers
needing reliable storage,
with fixed or indexed
pricing models. They
often include renewal
options and volume
commitments.
 Prons
Predictable revenue, Less flexibility to
lower price volatility, capitalize on short-
and strong customer term price spikes, and
relationships. potential risk if
demand declines.
Define short-term Contracts typically last

Details
contracts and their typical less than a year, allowing
terms. flexibility to adjust to
changing market
conditions. Commonly
used during peak demand
periods, with higher but
variable pricing.
 Prons
Flexibility, ability to Revenue uncertainty
capture high prices in and reliance on
peak demand, and fluctuating demand.
minimal long-term
commitment.
Asperct Long term COntract Short term contract
Definition Agreements lasting several years (often Contracts lasting from a few months
10-20 years), ensuring consistent supply. to a year, offering flexibility.
Pricing Usually linked to oil prices or indexed to Spot market or short-term pricing,
mechanism long-term natural gas price trends. often reflecting current market
trends.
Flexibility Low flexibility; fixed volume High flexibility; buyers can adjust
commitments over the contract period. based on current demand.
RIsk Lower price volatility but higher risk of Higher price volatility but allows
being locked into high prices during price taking advantage of low market
drops. prices.
Storage Supports seasonal storage or base-load Ideal for peak shaving or balancing
utilisation storage where long-term consistency is short-term supply-demand
needed. fluctuations
Asperct Long term COntract Short term contract
Sequrity of High, as supply is guaranteed over the Moderate to low; depends on
Supply long term. market conditions and supplier
availability.
Buyer Utilities, industrial users, and countries Traders, marketers, and users
Suitability relying on energy security. needing flexibility or short-term
coverage.
Negotiation High, as contracts involve extensive Moderate to low, with simpler terms
Complexity clauses and long-term commitments. and shorter negotiations.
Examples - Gazprom’s 20-year contracts with - Spot purchases of LNG by China
European utilities. during winter demand spikes.
- QatarGas contracts with Japan and - Short-term deals from U.S. LNG
South Korea for LNG supply. exporters.
 Impact of
Regulatory Types of
Deregulatio Case Study
Frameworks Regulations
n
Role of Regulatory Frameworks
in Storage Pricing

Government and industry regulations affect pricing

models, contractual terms, and market entry.
Regulations aim to protect consumers, ensure fair
pricing, and maintain market stability.
Types of Regulations Affecting Storage
1. Safety Regulations
These regulations ensure that natural gas storage facilities are constructed,
operated, and maintained to prevent accidents, leaks, and explosions.
•Key Requirements:
◦Design and construction standards for wells, pipelines, and surface facilities.
◦Regular inspections and testing of equipment to detect corrosion or leaks.
◦Emergency response plans and safety protocols for incidents.
•Examples:
◦Standards from organizations like the American Petroleum Institute (API)
or the Occupational Safety and Health Administration (OSHA) in the U.S.
◦Pressure monitoring and well integrity testing requirements.
Types of Regulations Affecting Storage
2. Environmental Regulations
Environmental laws govern the storage facility's impact on air, water, and land
resources.
Key Requirements:
• Measures to prevent groundwater contamination, including casing and cementing
of wells.
• Restrictions on methane emissions (a potent greenhouse gas) from leaks or venting.
• Environmental impact assessments (EIAs) before project approval.
Examples:
• The U.S. Environmental Protection Agency (EPA) regulations for methane emissions
under the Clean Air Act.
• European Union (EU) directives on environmental management for natural gas
storage.
Types of Regulations Affecting Storage
3. Operational Regulations

These regulations address how storage facilities are operated to ensure reliability and
efficiency in the supply chain.

Key Requirements:
• Storage capacity reporting to ensure transparency in gas volumes.
• Requirements for seasonal or peak demand planning.
• Limitations on injection and withdrawal rates to prevent geological damage.

Examples:
• Rules by the Federal Energy Regulatory Commission (FERC) in the U.S. for
operational transparency.
• Standards for gas compression and injection operations.
Types of Regulations Affecting Storage
4. Market and Economic Regulations

These regulations ensure fair pricing and market competition for storage
services.

Key Requirements:
• Open access requirements for third-party storage users.
• Price controls or tariff approvals for storage services.
• Anti-monopoly measures to prevent market dominance by large operators.

Examples:
• The U.S. FERC mandates for open access and fair pricing in interstate gas
storage.
• EU Third Energy Package for liberalized gas markets, requiring unbundled
storage services.
Types of Regulations Affecting Storage
5. Geological and Reservoir Regulations

These rules focus on the geological suitability and sustainability of underground

storage reservoirs.

Key Requirements:
• Approval of storage site geology, such as depleted reservoirs, salt caverns, or
aquifers.
• Monitoring of subsurface conditions to prevent ground subsidence or reservoir
overpressurization.
• Periodic audits of gas storage volumes and reservoir integrity.

Examples:
• Canadian provinces require reservoir simulation models to verify storage capacity
and stability.
• U.S. regulations for Class II injection wells under the Safe Drinking Water Act.
Types of Regulations Affecting Storage
6. Licensing and Permitting Regulations

Facilities must obtain permits to construct and operate storage sites.

Key Requirements:
• Obtaining permits for land use, water usage, and storage operations.
• Compliance with local, state, and federal approval processes.
• Renewal and periodic review of licenses based on performance.

Examples:
• U.S. Bureau of Land Management (BLM) permits for storage on federal
lands.
• Local government zoning laws and community impact considerations.
Types of Regulations Affecting Storage
7. Security and Anti-Terrorism Regulations

These regulations focus on protecting storage facilities from sabotage, theft, or

terrorist activities.

Key Requirements:
• Physical and cybersecurity measures to prevent unauthorized access.
• Risk assessments for critical infrastructure security.
• Collaboration with government agencies for national energy security.

Examples:
• The U.S. Department of Homeland Security (DHS) mandates for critical
infrastructure protection.
• EU policies on energy infrastructure security.
Deregulation allows for market-driven pricing and more
competitive contracts. While this can lead to innovation
and flexibility, it may also result in higher prices during
peak demand without regulatory constrain
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts

Scenario:
A natural gas storage provider operates in two markets: a
regulated market (Market A) and a deregulated market
(Market B). This case study explores how regulations
influence pricing strategies and contract options in each
market, highlighting the benefits and challenges.
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts

Regulated Market: Market A is regulated by a government agency that:

Sets maximum storage tariffs.
• Mandates open access for all market participants.
• Requires fixed, long-term contracts to ensure stable pricing and supply.

Impact on Pricing:
• Pricing Mechanism: Storage tariffs are capped, with costs determined by operational
expenses plus a regulated profit margin.
• Effect on Contracts: Long-term contracts dominate, providing stable revenues for
storage providers and predictable costs for customers.
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts
Benefits:
1. Price Stability: Customers are protected from price volatility.
2. Market Access: Ensures small players have equal access to storage services.
3. Security of Supply: Long-term contracts ensure consistent availability of storage
capacity.

Challenges:
1. Limited Flexibility: Providers cannot adjust prices to market demand changes,
potentially leading to lower profits.
2. Barriers to Innovation: Providers may lack incentives to invest in advanced
storage technologies due to regulated profit margins.
3. Risk of Underutilization: During low-demand periods, excess storage capacity
may remain unused due to contract rigidity.
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts

Deregulated Market: Market B operates with minimal regulation. Prices are determined
by market forces, and storage providers are free to negotiate contracts with customers
Details:
based on supply and demand.

Impact on Pricing:
• Pricing Mechanism: Prices fluctuate based on market conditions, such as seasonal
demand or natural gas shortages.
• Effect on Contracts: Providers offer a mix of short-term and spot market contracts,
catering to varying customer needs.
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts
Benefits:
1. Revenue Opportunities: Providers can charge higher prices during peak demand,
maximizing profits.
2. Flexibility: Diverse contract options (short-term, spot market) attract a wider range
of customers.
3. Incentives for Innovation: Competitive pressures encourage investment in efficient
and advanced storage technologies.
Challenges:

1. Price Volatility: Customers face unpredictable costs, especially during peak demand
or supply shortages.
2. Market Power Imbalances: Larger players may dominate, limiting access for smaller
customers.
3. Risk of Overpricing: Without regulation, storage prices may become excessively high
during crises.
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts
Comparison of Benefits and Challenges
Aspect Regulated Market Deregulated Market
Price stability Stable, predictable tariffs. Subject to fluctuations; can
be volatile.
Market access Equal access for all participants. May favor larger, well-
funded customers.
Revenue Limited by tariff caps. Higher potential during peak
opportunities demand periods.
Flexibility Limited contract variety (mostly Flexible contracts (short-term,
long-term). spot market).
Innovation Limited due to fixed profit Encourages investment to
margins. stay competitive
Case Study: Impact of Regulations on Underground Natural
Gas Storage Pricing and Contracts

Conclusion:
The regulatory framework significantly impacts how storage providers price
their services and offer contracts. Regulated markets promote stability and
fairness but may stifle innovation and flexibility. In contrast, deregulated
markets encourage competition and profitability but can lead to price
volatility and market imbalances. A hybrid approach—balancing
regulation for fairness and some deregulation for flexibility—can address
these challenges effectively.
Final Thoughts and Q&A

● Discuss the importance of

pricing mechanisms and
contracts in ensuring
sustainable and adaptable
storage solutions.
Any Question or Comment