A?ccording to recent Energy Information Administration (EIA) reports, U.S. working gas in storage as of mid-March stood at 1,745 billion cubic feet (Bcf), slightly below levels for the same period a year ago. This is due, in part, to colder-than-average temperatures during the 2010-2011 winter season, especially in the Northeast.

Storage operations play a critical role during cold weather, and efficient operations ensure that energy usage in surrounding areas is not inhibited.

Cold temperatures and production freeze-offs this February contributed to a larger-than-average expected draw on inventories. The EIA expects that inventories, though somewhat below 2010 levels for the first half of the year, will remain relatively robust, thanks to increasing onshore production in the shale plays. This is good news for storage operators like NorTex Gas Storage Co. LLC.

NorTex, based in Houston, develops, owns and operates high-deliverability, multicycle (HDMC) gas-storage facilities that are designed to meet the growing need for highly flexible deliverability. Service levels range from single-cycle to four-cycle service, including hourly profiling customized for the power generators who dominate gas consumption in the Dallas-Fort Worth area market during the summer.

The company was able to stay online during the most recent cold snap, a remarkable accomplishment considering the difficult conditions that developed as the Northeast was blasted with record amounts of snow and ice.

For Robert Foss, chief executive of NorTex, broad industry experience helps him prepare for difficult market and weather conditions.

“We keep our eyes open for expansion opportunities. In today’s marketplace, the spreads sometimes make it tough to expand storage, but if you can find the right location, you can always get storage to fill the cracks.”

“I have a very diverse background that ranges from marketing and trading, to pipeline operations, and retail natural gas. My knowledge around storage came from the marketing and trading side, where the company had a large portfolio of contracted storage that it managed and created value from,” he says.

According to Foss, running a successful storage company is all about a wide range of experience and attention to detail. “I’ve been all over this business for 23 years, in the operations side, and then on the marketing and trading side,” he says. “Running a storage business is about operations; it’s about execution and customer service. It’s about marketing your capacity to bring in revenue, so those two backgrounds marry well.”

Success stories

Most recently, NorTex launched an open season for storage capacity at its Hill-Lake and Worsham-Steed facilities in North Texas. Up to 6 Bcf of HDMC firm-storage capacity will be available there for service starting April 1, 2011.

The company currently owns about 35 Bcf of gas-storage capacity, with more than 750,000 dekatherms per day of aggregate maximum withdrawal and injection deliverability from its Worsham-Steed and Hill-Lake storage facilities. NorTex also owns pipeline interconnects associated with those, including a 60-mile pipeline at Worsham-Steed that links the storage facilities to pipeline interconnects.

Having a solid customer base is key, according to Foss. “They come back to us time and time again, because we continue to provide the service they expect. When you have good customers, who return time and time again to utilize your services, you build on that customer base. In the long run, you will build a successful company off that.”

The company holds an open season every year for the dual purpose of giving new customers the opportunity to lease capacity and existing customers the chance to expand service. “We pre-contract a lot of our capacity every year, as we roll our contracts. We try to save roughly 15% to 25% of our capacity to go out to an open season. Doing it this way does several things for us,” he notes.

“First of all, if there are prospective customers out there, new entrants in the marketplace, such as marketing or trading companies, producers or somebody that we’re not aware of, this practice gives them an opportunity to see the announcement and bid on the capacity.”

Second, the open season allows NorTex to gauge whether it needs to expand facilities or develop additional services. “It also helps establish what the price is on the current market. We might cut a private deal, then in the open season, people are willing to bid even more than the one-on-one negotiations we had. The private negotiations coupled with the open season give us a good mix in our portfolio,” says Foss.

NorTex currently owns about 35 billion cubic feet of gas-storage capacity.

Filling cracks

The company’s recent open season was an undeniable success. “It went well; we actually had demand for our capacity in excess of the capacity we had for sale,” says Foss. “So we were successful in selling all our older capacity that we hoped to sell, with a little spare demand out there. Although the spreads are really tight right now for storage, in that particular area of the market, demand seems to still be relatively healthy.”

All of the facilities’ capacity was expected to be fully contracted by April 1, thanks to loyal customers and a few new faces, according to Foss.

“We have a nice mix of customers, which is one of the things that help keep us successful. We have marketing and trading companies that hold capacity with us, we have power generators, we have some producers and we have some local distribution companies.

“We’re unique in the fact that our storage sits in a market area (the Dallas-Fort Worth area) and at the same time it’s in a production area (the Barnett shale area) and so, it gives us some unique characteristics and allows us to attract many different types of customers.”

Considering current market conditions, NorTex always considers expansion as an option to keep up with demand. Though storage acts as a gas-price equalizer, and is essentially an umbrella that operates by smoothing out periods of over- and under-production, the natural gas market is inundated with new demand thanks to unconventional shale plays.

Foss notes, “We’re constantly looking at the market, and at what our customers are demanding to see. We will do that if it makes sense to expand our facilities, or maybe add a new interconnection to one of the pipeline systems out there. Or, we can enhance our injection or withdrawal capacity.”

NorTex’s recently completed expansions include adding more compression. “Currently, we’re in construction and plan to complete a project early this summer. We’re adding more compression to our storage, which will allow us to increase our withdrawal capacity.”

NorTex is also considering expansion in the Rockies as an avenue for growth. “We’re always looking for opportunities to expand; we think the Gulf Coast area is pretty saturated with salt-cavern storage. However, we see opportunities looking out west and in the Rockies. We keep our eyes open for expansion opportunities. In today’s marketplace, the spreads sometimes make it tough to expand storage, but if you can find the right location, you can always get storage to fill the cracks.”

Weathering difficulties

New expansions might not be favorable in the coming years, however. “The challenges right now are to find ways to continue keeping your facility fully leased and your cash flow up in the face of these tight market spreads and low natural gas prices. I think people are going to do that, by taking care of their customers, and providing flexible services for storage and working with current customers so that they can understand and fully optimize the value of their storage contract,” says Foss.

Areas where power generation is in demand, such as Texas and California, are moving to replace power demand needs with wind generation. However, wind is, rather naturally, an intermittent resource. “I think the more wind, the more vital storage becomes on the intra-day markets, the more interesting things are going to get,” says Foss. “You have a daily gas market and you have an every-15-minutes power market, and storage is a great balloon that helps balance the daily market to the minute power market. I think there will be more volatility in that power market, as more and more wind generation and other intermittent generation comes on.”

Worsham-Steed Storage is a depleted oil and gas reservoir located near large reserves of natural gas as well as the rapidly expanding gas-fired power-generation market serving the greater Dallas/Fort Worth metroplex. It has a daily working gas capacity of 23 Bcf. Hill-Lake is located in Eastland County, Texas, and has a daily working gas capacity of 12 Bcf.

Right now, according to Foss, the industry’s greatest need is for capital and patience. “With the high liquids spreads, we are going to see a tremendous amount of development of natural gas, and that’s going to create a large opportunity in the midstream business especially around the liquids extraction and the liquids processing.

“At the same time, that’s going to produce a huge amount of gas. Prices are low, and until the industry can work with the general public to increase the demand for natural gas, I think those of us in the storage business, in particular, are going to have a tough couple of years. A majority of the time, the spreads center around volatility, and the absolute price of the gas, which is at $3.50 to $4. That doesn’t leave a lot of room for people to play in that market.”

The true issue for the industry and the market, according to Foss, will be finding ways to increase demand for natural gas. This would alleviate depressed gas prices and provide incentive for more upstream and midstream development. “I think the American Gas Association has probably got it right, and a few other folks, that the best avenue is in motor vehicles. Let’s focus on natural gas as a motor vehicle fuel and let’s create more demand for natural gas as a fuel. As we do that, I think the market will improve for all of us,” says Foss.

Market volatility might not be the only challenge for the storage industry. Additional regulation may cause problems for midstream operators and storage providers.

However, increasing regulations have yet to prevent NorTex from coming through in a pinch. “During the cold snap back in February, when people were faced with rolling power outages, and losing not only gas service but electric service, that’s when storage needs to be there. We were able to shine through that period of time, and we were one of the few facilities that stayed online the whole time,” says Foss.

“We provided a little better than 20% of the entire gas demand for the Dallas-Fort Worth area during that period.”

Though the market outlook suggests tough times may lie ahead, experienced storage providers like NorTex will continue to weather the bumpy ride, through rain, snow or shine, provided that new demand and new avenues of growth are realized.