CHAPTER 10 BUILDING YOUR OWN UNDERGROUND GAS STORAGE PROJECT: FROM LEASING TO OPEN SEASON UNDER FERC ORDER 636

• Jurisdiction: United States

Oil and Natural Gas Pipelines: Wellhead to End User
(Jan 1995)
CHAPTER 10
BUILDING YOUR OWN UNDERGROUND GAS STORAGE PROJECT: FROM LEASING TO OPEN SEASON UNDER FERC ORDER 636^*
Jerry R. Fish
Robert A. Nelson
Stoel Rives Boley Jones & Grey
Portland, Oregon
SYNOPSIS

§ 19.01 Reasons for Underground Storage

[1] Seasonal Price Swings for Natural Gas

[2] Gas Supply Peaks

[3] Gas Supply Security

[4] Effects of FERC Order No. 636

[5] History of Underground Storage Development

[6] Independent and HUB Storage Projects

§ 19.02 Types of Gas Storage

[1] LNG Storage

[2] Gas Storage in Aquifers

[3] Gas Storage in Depleted Natural Gas Reservoirs

[4] Gas Storage in Salt Caverns

§ 19.03 Acquiring Property Rights Required for Underground Storage Operations

[1] Surface Rights

[a] Description of Needed Surface Rights

[b] Means of Acquiring Surface Rights

[2] Rights in the Storage Reservoir

[a] Subsurface Rights Needed for Storage

[i] Rights for Exploration, Drilling, and Operation of Storage Reservoirs

[ii] Rights in Native Gas, Recoverable and Unrecoverable

[iii] Rights in Other Minerals in the Storage Area

[b] Identifying the Owner of Property Rights To Be Acquired; Is The Storage Formation Surface or Mineral?

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[3] Problems When Storage Gas Invades or Occupies Unacquired Property

[a] Establishing Ownership of Injected Gas

[b] Proving Proportional Ownership Where Injected Gas Is Commingled with Native Gas

[c] Trespass by Injected Gas

[4] Strategy Issues in Acquiring Storage Property Rights

[a] Who First?

[b] Top Leasing Storage Rights

[5] Condemnation of Property for Storage

[a] State Condemnation Statutes

[b] Condemnation Under the Natural Gas Act

§ 19.04 Regulatory Framework for Underground Storage

[1] State Energy Facility Siting Acts

[a] Statutory Purpose

[b] Qualifying Criteria

[c] Process

[2] Storage Projects Below EFSC Threshold

[a] State of Washington Oil and Gas Conservation Committee

[b] State of Washington Pipeline Regulation

[c] County Land Use Authority

[3] FERC Regulation of Interstate Projects

[a] Activities Before Applying for a Certificate

[b] Activities Pending Certificate Approval

[c] The Certification Process

[d] FERC Order No. 636 Open Season Requirements: Can Developers Control Storage Capacity?

[e] FERC Tariffs: Market-Based Prices or Cost-of-Service Rates?

§ 19.05 Business Entities for Independent Storage Projects

[1] Co-Tenancy: A New Use for the Model Form Mining Venture Agreement

[2] Partnership

[3] Corporate

§ 19.06 Appendix

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Introduction

Following Federal Energy Regulatory Commission (FERC) Order No. 636, the underground storage of natural gas, employed in the United States since early this century, has become more valuable than ever as an alternative to building new interstate pipeline capacity. Further, development of storage projects is no longer the exclusive domain of interstate gas pipeline companies and local gas distribution companies. Underground gas storage can now be developed by producers, marketers, and large industrial gas users as well. This paper attempts to survey the technical and legal issues involved in developing a new underground gas storage project.

§ 19.01 Reasons for Underground Storage

[1] Seasonal Price Swings for Natural Gas

The price of natural gas varies between "peak" and "off-peak" periods because the demand for natural gas is seasonal and temperature sensitive. Because storage injections shift gas purchases from winter (peak) periods to summer (off-peak) periods, gas purchase costs are reduced.¹

In markets where natural gas is not extensively used for electric generation, the peak period of high demand is the winter heating season (usually November through March). The off-peak period of low demand is the remaining seven months (April through October).

In markets where natural gas is extensively used for electric generation, the peak period consists of the five winter months and, to a lesser extent, the warmest summer months (June through August). The off-peak period includes the spring and fall "shoulder" months (April and May, September and October).

In the Pacific Northwest over the last five years, the difference in the spot market price of natural gas between peak and off-peak periods has been in the range of $0.40 to $0.80 per one million British thermal units (MMBtu). The reduced off-peak cost of purchasing natural gas for storage injections is a significant benefit in terms of evaluating the economics of storage development.

[2] Gas Supply Peaks

Storage has always been valuable for meeting peak period, winter demands. The residential and commercial markets are temperature sensitive, low load factor markets. Daily and seasonal storage capacity can be developed to match and follow the demands of residential and commercial customers.²

Storage located near major markets (market area storage) is particularly valuable for this purpose. It is expensive for gas users to purchase transportation capacity on pipelines between gas production areas and population centers for peak season service. For example, the current tariff for firm pipeline transportation service between Colorado and Seattle on Northwest Pipeline Corporation facilities is $0.27 per MMBtu, assuming the capacity is used constantly 365 days per year (a 100% load factor). However, if that same pipeline space is used to serve a demand increment that occurs only 10% of the days each year (a 10% load

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factor), the effective cost per MMBtu is $2.70. In a recent presentation, a Northwest Pipeline representative estimated that for large gas users with load factors lower than 45%, it may be less expensive to acquire underground gas storage service near the point of use than to acquire firm transportation service from wellhead to burner tip.³ In 1991, BC Gas Inc. estimated that if a suitable reservoir could be found in its service area, an underground storage project estimated to cost $104 million would save BC Gas Inc. customers over $30 million per year in avoided costs that would otherwise be incurred for expansion of the Westcoast Energy pipeline to production areas in northeast British Columbia.⁴

Thus, market area storage and local transportation service can be an economic substitute for additional transmission capacity on interstate pipelines.⁵ Northwest Natural Gas Company, a local distribution company serving over 370,000 customers in western Oregon and southwest Washington, estimates that on a peak day, 54% of its customers' demand is served from storage facilities (including aboveground liquified natural gas (LNG) facilities and underground storage).⁶

Interstate pipelines and local gas utilities (commonly referred to as local distribution companies or LDCs) use underground storage to balance the relatively constant flow of gas from supply areas with the irregular daily use of gas by residential and commercial customers. When usage is low, gas is injected into storage. When large numbers of customers simultaneously call for gas, the pipeline or LDC withdraws gas from storage to keep its line pressurized. Northwest Pipeline estimates that 66% of its balancing is accomplished through the use of storage. The remainder is accomplished using the inventory of pressurized gas in the pipeline itself, referred to as "linepack."⁷

[3] Gas Supply Security

Market area storage is particularly valuable for service reliability. The location of storage gas supplies close to markets minimizes interruptions or curtailments of service. Most storage facilities are directly connected to interstate pipelines, LDCs, or large industrial customers and are "downstream" of production areas. As a result, storage is less subject to well freeze-offs, processing plant outages, and pipeline capacity constraints than production area gas supplies. During severe winter storms, gas well equipment and pipeline compressor stations in Canada and the Rocky Mountains can freeze and break down.⁸

Storage provides flexibility in nominating and scheduling gas supplies from all available supply sources to meet changing market demands.⁹ Some interstate pipelines allow customers

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to change their storage injection and withdrawal nominations before the beginning or even during the gas day.¹⁰

[4] Effects of FERC Order No. 636

Federal Energy Regulatory Commission (FERC) Order No. 636 encourages additional development of storage projects for four reasons:

1. Unbundling of Services. Before FERC Order No. 636, interstate pipelines could provide bundled gas transportation, storage, and commodity sales service for customers. FERC Order No. 636 requires the unbundling of interstate pipeline sales service into storage and transportation services that can be purchased separately.¹¹ Each interstate pipeline must "offer access to its storage facilities on a firm and interruptible open-access contract basis."¹²

Individual customers now control storage deliverability and capacity. As a result, interstate pipelines have less flexibility to provide daily balancing of gas put into the pipeline by customers and gas withdrawn by customers. Customers and third party brokers now need to purchase their own storage service, designing the total capacity and daily injection and withdrawal rates to suit their individual needs.

2. Straight Fixed Variable (SFV) Rates. Prior to FERC Order No. 636, interstate pipelines used a "modified fixed variable" rate design, in which a portion of the pipeline's construction and operating cost was recovered through a demand (or reservation) charge; the remainder was recovered through a commodity charge per MMBtu of gas actually transported. As a result, a customer who purchased firm transportation service experienced reduced...