Underground Gas Storage: Beyond the Tip of the Iceberg
Underground gas storage (UGS) in Europe can provide a security blanket for unpredictable circumstances, but the paradox is that no one wants to pay for it in Europe's depressed natural gas market, according to speakers at the European Gas Conference in Vienna, Austria.
Geoffrey Hureau, General Secretary, CEDIGAZ, showed that by 2014 European storage comprised around 100 BCM, with three countries – Germany, Italy and France – making up about 50% of capacity for all countries in Europe.
In terms of the ratio of total gas demand in Europe and the total working gas capacity, he reported it is about 20% overall, but there's much variation among countries.
Mr. Hureau said much growth has been seen in working gas capacity: “More than 15 BCM have come online since 2010.” He showed this had happened despite the drop in gas demand, and that 19 underground gas storages have been commissioned in the last 4 years.
He offered some context. “Gas demand has lost 11% between 2010 and 2013,” he remarked, “so this has caused an excess capacity in gas storage, with depressed prices and a low value for storage.”
The measures of this, he said, are the low seasonal spreads and high volatility.
Mr. Hureau's presentation slide read “Storage Glut” and included a graph that showed gas demand plunging, while underground gas storage made its steady climb up to nearly 100 BCM of capacity. The price and value of storage have consequently been going down, he said.
He showed how Centrica's storage assets have shown a drop in operating profit, from over GBP 150 million in 2010 down to just over GBP 50 million in 2013.
“To summarize, today the market does not value storage assets,” he explained, adding that the result was an excess capacity of storage with depressed prices and a low value for storage.
Still, Mr. Hureau pointed out that new storage capacities continue to be commissioned, “because the capacities that have come online recently and continue to come online have been decided in the last decade, at a time when the situation and expectations were very different – no one expcted to see the gas market in the state it is in now.”
How much storage one actually needs for energy security was the difficult question addressed by Dr. Peter Klingenberger, Chairman of the Board of Management, E.ON Gas Storage GmbH, who said “If you expect me to give you a number by the end of my presentation, you'd better leave the conference now.”
E.ON, he said, finances, builds and operates gas storages, possessing an entire portfolio of services around storage. The company, according to him, intends to spearhead new trends and develop new innovations for energy storage, like power-to-gas for producing hydrogen. Mr. Klingenberger named E.ON's storage facilities in Germany, Austria and the UK.
His presentation showed an iceberg to explain the different values of gas storage.
First, he explained the visible part of the iceberg: “That indicates that people only pay for what they see – the value of how we see it as a storage operator is the market value.”
That's where the intrinsic value is, which is the difference between the summer and winter price spreads, he said.
“The extrinsic value is much shorter,” he explained. “It gives the price peaks in a very short period and adds volatility; it's not predictable, but may give you an enormous advantage when volatility is there, if it's not depressed.
As for the invisible portion of the gas storage “iceberg,” Mr. Klingenenberger had “insurance value” below the surface, a hedge against supply risk, which was not being paid for.
“It is the loss of supply of one major source,” he explained, offering that it could, for example, be a technical cutoff from Norway, or a cut in deliveries in the east of Europe as experienced years ago.
The third aspect he named is the system value.
“One should not forget that roughly 450 BCM is the consumption of Europe and out of that one-third is indigenous production, which has come down in the last 10 years,” said Mr. Klingenberger. “But this production is still there, and if you can shape production peaks with storage, it's all fine because you are covered.”
Again, he reiterated, it is unpaid, even though it made for efficient gas transport..
He recalled the “unbundled world” of storage and transportation, which allowed for optimization of storage and transportation, but said it is no longer the case.
Today, according to Mr. Klingenberger, the cost plus the margin made by a storage operator to make up its operating costs and capital costs did not make for an economically viable process. At present, he said, only the intrinsic value is being paid for, at around EUR 2.
Storage operations, he reported, are suffering and no storages can be built on commercial grounds – a “no-go.”
“There may be strategic grounds or physical grounds,” he commented, adding that the spreads are getting narrow and narrower.
“This is very discouraging for customers to book and if they're really locked into long-term contracts, they have a real problem, and we see that they're breaking contracts on commercial grounds, thereby destroying long-term relations that have been established over 30 years.
In 2014, he recalled, was interesting because gas storage facilities were full and an increase of the spread to EUR 8. He reported that customers had hedged the price, but couldn't benefit from it, because there was a price peak that no one had been able to predict.
Despite this, he reported that E.ON's storage customers are able to take advantage of spreads, in the UK injecting gas during the night and withdrawing from 6pm onward, when “everyone puts the kettle on.”
Expectations of using more gas-fired generation, he said, had not come to fruition, and while a 6-7-fold increase in the carbon tax would be necessary, Mr. Klingenberger said it was an illusion.
“So, gas-fired power stations are idle, earmarked to be mothballed and this is a tendency that's difficult.
Energy efficiency from households, he added, will keep consumption steady, but industrial consumption is down 10%.
Trade-oriented customers, he said, are only interested in the gas price at the hub, where there was no actual gas.
He explained how storage operators reacted thus: “We have to follow the market; we cannot whinge around and complain – we have to invent innovative products, optimize/preserve assets and close or mothball storage facilities.”
Mr. Klingenberger showed a map of security of supply needs covered by storage. He explained, “The further you get to the east, the percentage of coverage of import volume is higher because towards southeast Europe you have only one source – the Russian supply. So the more you rely on a single source, you'd better cover your supply with storage.”
He outlined various storage regimes like “SOS regime” or “TSO obligation,” but said there is no simple standard regime to address his question.
Meanwhile, he showed that the booking of storage for 2014 was as high as 90% for much of Europe; Ukraine's storage was filled above 50%. The year 2012, he recalled, had a very long cold spell, when E.ON produced 130 MCM of gas, but wasn't able to get it to southern Europe.
One size, he said, does not fit all.
He commented, “The physics do define what's needed.”
According to him, non discriminatory rules are needed for storage users in emergency situations and costs must reflect transit fees so that customers are not penalized.