Underground Storage: Down in the Dumps
Europe will continue to need underground gas storage (UGS), and should be building more, but no business rationale exists at present to do that, according to Geoffroy Hureau, General Secretary, CEDIGAZ, who spoke at the European Gas Conference 2014 in Vienna, Austria.
CEDIGAZ, which is an international, a reference source of fundamental gas data since 1961 with 100 members in 40 countries, keeps a database on UGS.
Mr. Hureau said there were 130 UGS facilities in Europe, including non EU countries, comprising a combined capacity of 99 BCM and total withdrawal rate of approx. 2 BCM/day. Since CEDIGAZ's last report, 13.5 BCM of new capacity had been commissioned via 15 new facilities as well as expansions of existing sites, he offered.
The increase in storage capacity, he noted, appeared with the backdrop of decreased gas demand, a depressed gas market. “While the storage capacity increased by 60% since 2008, gas demand increased by 8%, so it's quite paradoxical but you have to consider the long lead time on these facilities to build new UGS. The decisions to build these were taken in the first half of the last decade,” he explained.
Exacerbating the situation, said Mr. Hureau, were the decreasing summer-winter spreads and decreasing volatility. He commented: “Those two factors are the drivers of storage value and because of this there's no business case for storage at the moment in Europe.
“These decreasing spreads and volatility are due to an excess of supply in Europe and competition from other sources of flexibility: LNG, interconnectors and spot gas, as well as increasing storage-to-storage competition.”
Between 2000-2010 LNG imports to Europe, he said, had grown from 33 BCM to 87 BCM – more than doubling.
“Then, in 2011, it leveled out with the Fukushima accident, and in 2012 it decreased by 30%. Last winter it decreased again by about the same amount, so this is due to a recent tightness in the LNG market as you are all well aware of.”
Given the current state of spreads, explained Mr. Hureau, the financial value of storage had gone down, as there was arbitrage between storage and non storage, which was linked to the level of the spreads. “The value of storage in these market conditions has eroded.”
Because of the low spread, he noted, shippers had no incentive to store gas and the use of storage facilities had come down. Inventories, he added, had gone down.
“At the end of last winter, gas in storage was quite low. He said this had economic consequences for storage, as well as operational consequences: “The ability to draw gas at the optimum rate depends on the quantity of gas in the storage and it goes down with that quantity. If you want to be able to use your storage at the end of the winter it's better to have it filled at the beginning of the winter,” he explained.
All of this added up to very little business rationale, he said, for building new storage. Some facilities had been mothballed in France, he recalled, while many projects had been postponed or even cancelled.
Despite that, Mr. Hureau said that storage was very useful to have in the winter, showing a diagram of what had happened last winter: “Underground storage supplies more flexibility during peak demand,” he added.
For the last two winters, he explained, LNG supply had gone down by 32% but was compensated by storage that had gone up 40%. “Even if there is no financial incentive to use storage, we cannot do without storage.”
As more and more UGS was used up during those winters, it eventually lost its flexibility and was replaced by interconnectors and LNG supply, which he said was highly unpredictable.
“If we look at the ratio of working gas capacity to gas demand, on average in Europe it's 90%, but it ranges from 3% in Belgium to 160% in Latvia. This doesn't necessarily mean that Belgium needs more underground storage, but if you look at the two main gas markets in Europe – Germany and the UK – here you have ratios of 26% in Germany, but only 7% in the UK,” he remarked.
CEDIGAZ, he said, forecast that up to 2030 average gas demand growth in Europe would be around 0.7%/year, coupled with a decrease in domestic production of 30%. “This was before the announcement on Groningen,” he explained (Editor: The Netherlands announced in Jan. 2014 that it would cut gas production by one-fourth at Groningen, the largest gas field in western Europe.) “As a result the dependence will grow from the approximate 50% now to 70% and new imports will come from both pipeline and LNG.”
Meanwhile, about 25-30% of coal capacity would be phased out, according to Mr. Hureau, who said an impending share of intermittent power would mean more flexible back-up would be needed in the form of gas.
All in all, he concluded, this called for more underground gas storage, as would indigenous sources like shale gas and new sources coming online like those from Azerbaijan. Storage contributed to the connectivity of the gas grid.
Of 85 BCM of planned UGS projects, 22.5 BCM were under construction and would be completed before 2025. “By 2030 there will be an additional 38-42 BCM of storage in Europe.”
While there was no incentive to invest in storage, the security of supply challenge may require a framework in which storage could be developed, concluded CEDIGAZ's Geoffroy Hureau.