Gas storage turns resource into buried treasure

Tapped wells being turned into underground tanks, as demand grows near cities

NELSON ANTOSH, Copyright 2004 Houston Chronicle Published 6:30 am, Sunday, December 12, 2004

In his Galleria-area office, John Hopper scans a colorful three-dimensional seismic image of an ancient ocean reef buried thousands of feet beneath rural New York.

The bright spots show where a wildcatter would sink oil and gas wells. But the president of Falcon Gas Storage has another motive for paying $3 million for seismic images of these underground formations: He wants to pump natural gas back into the ground.

This formation, as it turns out, is a fizzled-out natural gas field. The purpose of privately held Falcon is developing many such fields into natural gas storage reservoirs to supply big cities during the cold of winter and the heat of summer.

Hopper doesn't hesitate to use the latest technology designed for getting oil and gas out of the ground, such as horizontal drilling and hydraulic fracturing, to speed the process of filling and draining these reservoirs.

"Drill bigger wells, use bigger pipe, bigger compression. Spend a bunch of money," is how Hopper describes it.

Falcon and others are out to expand the total gas storage in the United States, which has been basically flat for the past 10 years. More than 73 projects, new and expansions, have been proposed for the period between 2004 and 2008, according to Jim Tobin, an analyst for the U.S. Energy Information Administration.

In other parts of the nation, companies are pumping gas into aquifers, hollowing out big holes in underground salt domes and developing variations on that method, like using water to create caverns from thick layers of salt in regions where there are no salt domes.

All of them are designed to serve companies that need to build up supplies for peak demand periods of the year, plus to serve speculators looking to profit from big price swings by purchasing gas when prices are down and storing it until they can sell when prices are up.

Strangely enough, there was a substantial slowdown in storage growth during 2003, off about 27 percent from 2002.

That slowdown was primarily the result of the financial and legal difficulties of pipeline companies and natural gas merchants going back three years at least, said Art Gelber of Gelber & Associates, a consulting company. This trend was in direct opposition to market signals, he said.

The slowdown, which coincided with the collapse of Enron, triggered financial crises in some major players in the gas pipeline business, including Houston's El Paso Corp., which has focused on selling assets to lower its debt.

El Paso is the king of North American gas storage, with more than anybody else. Its largest single unit in terms of capacity, which is associated with its ANR pipeline system, boasts 15 depleted fields and a total of 975 wells. The bulk of its storage is located in Michigan.

The company sees the demand for storage facilities able to deliver natural gas more quickly, outpacing the growth in demand for more storage facilities. El Paso's recent investment is mostly intended to increase deliverability of its current facilities rather than adding storage volume, said Byron Wright, vice president for strategy and rates for El Paso Pipeline Corp.

The existing storage on an industrywide basis "is about as full as it gets; we are full as a tick right now," says Wright, who doesn't see much letup in the seasonal up and down needs for natural gas.

A new breed

Falcon Gas Storage is part of a new breed of storage developer, growing within a business historically confined to the gas utilities and pipeline companies. Storage is usually looked at as a way to balance supplies, but in Falcon's point of view, it is a way to capture the value of the wild gyrations in natural gas prices.

Falcon makes its profit by charging for the space, in addition to charging for putting the gas in and pulling it out.

Storage wasn't such a big deal back in the 1990s, when natural gas was cheap and the spreads were small, says Hopper.

"We're injecting gas into storage right now making spreads of $1.50, the difference between the price going in and what we can hedge for the price coming out. It used to be you could buy gas for $1.50. It's truly amazing. We've just seen a paradigm shift in the value of storage because of that. It's very simple — buy low, put in storage, and sell high."

The result is a sort of land rush in the storage business, according to Hopper, not unlike a gold rush or oil boom.

"You'll see these people kind of coming out of the woodwork. They will go buy a piece of property on top of a salt dome and declare they're in the storage business, or they go and tie up a reservoir and say they've got a storage project," Hopper says.

Safety concerns

Salt domes are pretty much limited in location to the Gulf Coast.

These huge formations well up from the depths like massive globs in a lava lamp. Holes larger than a skyscraper can be washed into them with water, then used for storage.

Hopper has a bias against salt caverns because they are more expensive to develop, and he says their safety record isn't all that good, citing the towering geyser of flame that shot from a cavern near Moss Bluff last August.

His other argument against them is they mainly are found along the Gulf Coast, which he says is probably overbuilt or will be soon.

But other operators prefer salt domes because the gas can be injected and taken out more quickly than from depleted reservoirs.

Stringent criteria

The number of times an operator can put gas in and pull it out is called "cycling." A salt cavern might cycle 12 times a year compared with only once for some depleted reservoirs. Falcon's storage locations are designed to cycle three or four times a year.

A new wrinkle on that approach are projects where the developers will wash out a cavern in bedded salt, which amounts to a thick, horizontal layer of salt underground. These beds appear to be the only storage option near some big cities.

Hopper's 4-year-old company has about 22 billion cubic feet of working storage in operation now and roughly 80 billion cubic feet under development. Its operating storage is near Fort Worth, where gas is plentiful, and also near Abilene.

To be useful for storage, an old field has to contain rock that is both porous and permeable, the underground rock has space in it to hold the gas and it allows the gas to flow through it relatively easily. Ideally these formations need to be from 2,000 feet to around 4,500 feet. The shallower it is, the less pressure it takes to pump up. The location needs to be accessible to pipelines, ideally more than one.

"New England has none, and there are very few in the desert Southwest," Hopper says. "There are really none around Phoenix — that would have to be salt storage. So you really have to hunt around to find the right reservoir with the right characteristics in the right place, and there are just not a whole lot of them out there."

nelson.antosh@chron.com