Natural gas storage serves as a vital “shock absorber” that evens out cyclical demand for the hydrocarbon, according to James Hoff, vice president of reservoir engineering at Merchant Energy Holdings LLC. His firm operates the East Cheyenne Gas Storage complex in northern Colorado, a key addition to midstream infrastructure in the Rockies.

But Hoff told Hart Energy’s recent DUG Bakken and Niobrara conference in Denver that storage will continue to grow in the midstream sector beyond its traditional, seasonal matching role.

“It’s all about optionality,” Hoff said, adding not all producers agree with his view.

“Producers tell me they are a balanced shipper, that they don’t need storage; if I’m balanced, why pay for storage?” Hoff told the conference’s midstream track. “But there is no such thing as a balanced shipper.”

He illustrated his presentation with graphics that compared the highly cyclical demand for gas with comparatively stable production from wells. But service interruptions are part of any production operation, and storage helps assure gas continues to flow no matter the situation.

Storage was traditionally part of pipelines’ function in moving gas to market; that’s changing as the midstream evolves into separate, stand-alone services linking production and consumption, he added.

Hoff said producers should view storage as insurance that deliveries can continue during interruptions. He cited the example of producers in Colorado’s Piceance basin who had to shut in wells for days when related natural gas liquids processing and transportation problems forced the major gas pipeline serving the region to shut in.

“That caused huge losses” for producers who could not ship gas. Had they had gas in storage they could have honored contract commitments and maintained cash flow, he pointed out.

“Oil producers will spend millions of dollars a year on insurance and other things” but won’t consider storage for associated gas production because of its cost, he said. “The more sophisticated producer shows interest in the storage opportunity.”

And storage can be comparatively cheap insurance, he added, citing storage rates of around 10¢ per million Btu per month. Just one day of production loss for crude oil producers who must move associated products can exceed what it costs to store the gas. For gas producers, it might take several days for the storage costs to be a wash, but can still be vital.

East Cheyenne began operation in late 2011. It connects to the Trailblazer Pipeline near the Cheyenne gas pipeline hub. It was the first independent gas storage operation serving the Niobrara and other producing areas in the Rockies.

The company is in the middle of an expansion that could give the complex 14.5 billion cubic feet (Bcf) of working gas capacity with a maximum withdrawal rate of 350 million cubic feet per day by 2014. Merchant is looking at additional pipeline connections.

Hoff added expansion will be necessary, in part, because of Colorado’s emphasis on renewable energy. “We love renewables,” he said, pointing out renewable-power operations, such as wind and solar, must have backups. That nearly always means gas-fired power generation.

Changing dynamic

While storage is seen as insurance for producers, those on Wall Street are beginning to disagree. In the past, storage has been a hot commodity but change is on the way for the storage business as increased production output and lower profits have dampened the spirits of commodities traders, according to the Wall Street Journal.

Twenty years ago, gas prices were high, supply was short and price volatility turned gas storage into a lucrative investment for those looking to capitalize on a vulnerable market. But, there are signs that the appeal is waning.

According to the latest storage data collected by the Federal Energy Regulatory Commission, the amount of financial firms leasing storage space dropped 0.8%, the first drop in 10 years, according to the report. The downturn is expected to continue as many leases are not expected to be renewed, which could cause even more price fluctuations.

Currently, there are more than 400 active, underground storage facilities in the Lower 48, and the effect storage has on market dynamics depends on the regions and subsequent markets they are being developed in, according to Bentek analysts at a recent Benposium conference. Historically, natural gas storage has played a pivotal role in the supply and demand fundamentals throughout the U.S. Now with increased domestic onshore production, supply is steady and price volatility has almost become a thing of the past, according to Bentek analyst Ryan Smith.

But it is not all bad news, Smith said. Financial institutions still lease a large amount of gas storage space—514 Bcf—that is interconnected with pipelines, which can feed supply to still-stranded markets.

“U.S. pipelines connect supply to demand, and that’s always evolving as we’re discovering new supply sources,” he said. “Big decisions can be made on long-term or shortterm market dynamics, and it’s important to view them as different contracts. But, storage can still play an important role; it really does offer a balance for the market.”

Jennifer Giambi, assistant editor, contributed to this story.

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