Will Natural Gas Inventories Hit Their Caps This Fall?

By Thomas W. Overton

San Diego, 20 March 2012 — A fair amount of ink has been spilled in the commodities market over record natural gas storage inventories in the U.S. As of March 9, they stood at 2,369 Bcf, a whopping 735 Bcf more than this point last year, and well above the previous end-of-season record of 2,148 Bcf set in 1983.

The winter heating season, when gas inventories decline as stocks are withdrawn, traditionally ends at the end of March. However, there are reports that injections have already begun, and that this week’s EIA report may actually show a rise in gas storage rather than a decline.

Gas stocks hit an all-time peak of 3,852 Bcf last November, and that was with end-of-March inventories at 1,581 Bcf, far lower than they are now. This raises the possibility that storage operators could begin running out of space some time this year.

U.S. Gas Inventories (EIA)

How much space is there? First, one needs to draw a distinction between gas used to maintain adequate pressure and withdrawal rates (known as base gas), and gas available for withdrawal (known as working gas). Inventory levels reported by the Energy Information Administration (EIA) are normally given in terms of working gas.

According to the EIA the maximum total gas storage capacity for 2010 (the latest point for which data is available) was 8,763 Bcf. However, more than half of that is taken up by base gas. Total working gas design capacity as of April 2011 was around 4,353 Bcf. While that’s 501 Bcf above the all-time high set last year, we’re likely to end this March with inventories at least 700 Bcf above where we were last March.

Net injections into storage during the spring and summer months (Apr-Oct) totaled 2,223 Bcf last year, and 2,217 Bcf in 2010.  We would need to add only about 2,000 Bcf to fill the storage reservoirs to their brims. Unfortunately, the EIA’s Annual Energy Outlook is projecting total gas production (extraction plus imports) to grow by 0.46% over 2011, while consumption grows by only 0.21%. That would mean net injections of about 2,228 Bcf for 2012—assuming there was that much capacity.

But it gets worse. Our storage network comprises over 400 fields spread across 30 states, and moving excess inventory from one field to another is not always easy or even possible. A few of those fields, or portions of them, are also inactive, but are included in the EIA’s figures for total capacity.

Of course, all of this is without getting into the complicated economics and market behavior that governs why and how gas goes into storage. Suffice to say it is not simply a matter of excess gas going into the nearest reservoir—far from it. What is likely, no matter what reservoirs hit their capacities—and some clearly will—the industry is facing the prospect of large quantities of gas being dumped onto the market later this year, driving prices down even further, perhaps into negative territory in some regions. Hold on to your hat.

—Thomas W. Overton is GAS POWER’s editor