Kenneth L. Beckman

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Natural Gas Storage Planning, Feasibility, and
Implementation
Presented by Kenneth L. Beckman International
Gas Consulting Society of Petroleum Engineers
(SPE) Pontiac, IL March 5, 2009
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• Storage Planning Questions
• Who?
• Whos doing storage planning? Do current storage
  planners differ from those who planned storage
  development in the past?
• How?
• How do they plan for storage now? Do they use
  different tools?
• What?
• What types of storage are being planned?
• When?
• Macro view Is more/less storage being planned
  than in the past? Micro view Has the timing of
  storage planning and implementation changed?
• Why?
• Why plan for any more storage?

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• Who Plans Storage Past
• For the majority of the industrys history,
  underground gas storage in the U.S. has been
  planned and developed by transmission pipelines
  or Local Distribution Companies (LDCs) as part of
  their utility function.
• The storage developed by these entities was a
  cost-of-service function that was bundled in the
  rates and fees reviewed and authorized by their
  jurisdictional agencies.
• With little or no financial incentive to minimize
  planning and construction time, storage
  development under these entities was methodical
  and measured.

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• Who Plans Storage Current
• During the past 15 years, third-party developers
  have become the leaders of storage development.
• Storage rates have migrated from cost-of-service
  to market-based rates.
• With market-based rates, the storage developer
  assumes all of the risk of obtaining an
  acceptable storage fee for their service and rate
  of return for the project.
• Consequently, the storage developer attempts to
  minimize the time and costs from concept
  inception to the storage in-service date.
• However, the storage developer must make sure
  that all of the underlying assumptions of the
  project, ie capital expenditures, market demand,
  geo-technical promise, regulatory process, etc.,
  are positive since the developer is assuming all
  of the projects viability risk.

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• How to Plan Storage
• As in the past, storage is planned to meet an
  anticipated demand and storage development still
  takes a substantial amount of time from project
  conception to the first in-service date.
• The tools for planning storage have gone, and
  continue to go, through major enhancements.
  Originally, storage planning utilized pencil,
  paper, and calculators to chart the costs and
  progress of the permitting and construction of a
  storage project.
• With the advent of the personal computer, the
  planning functions migrated to an electronic
  format using generalized spreadsheets and
  timeline software.
• Currently, the planning functions are most often
  incorporated into specialize modules and computer
  programs that are designed solely for project
  planning. This allows for much more detailed
  planning, tracking of activities and costs,
  enhanced control, and reporting of the project.
  

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• Storage Planning Considerations
• For a storage development to be successful, the
  developer must plan and implement the activities
  associated with the following categories
• CommercialDemand and rates
• Geo-technicalReservoir or salt capability
• FinancialCredit-worthy customers as well as
  strong equity
• RegulatoryOversight acceptance
• TechnicalConstruction risk

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• Types of Storage Being Planned
• Because of limitations in geology and technology,
  there still are only a few general categories of
  natural gas storage
• Underground Gas Storage (UGS)
• Depleted Reservoirs
• Aquifers
• Caverns
• Surface Storage
• LNG
• Propane
• Propane-Air

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Storage Facility Types Defined (Pt 1)
Depleted Reservoirs Depleted oil and gas fields
are the most prevalent storage medium.
Structural fields have created a hydrocarbon
containment through mechanical deformation,
whether by the folding or faulting of rock
formations. Stratigraphic fields create
containment by material changes in successive
layers. Reef fields have been created within
preserved coral reefs from ancient seas. The
cushion gas requirement for a depleted field
generally averages around fifty
percent. Aquifers Aquifers are porous and
permeable water-bearing rock formations offering
either structural or stratigraphic trapping
mechanisms. Aquifer storage is the second most
prevalent type of storage, with some very large
fields located in the upper midwestern U.S.
Their primary drawback for use as a natural gas
storage facility is the cushion gas requirement,
which can be as high as eighty percent of the
total gas volume. In addition, long development
times, typically about five years, are generally
required in order to test and characterize the
trap for suitability for storage. Aquifer
storage is typically slightly more expensive than
depleted reservoir storage to develop and use,
due to the higher base gas and operating cost
requirements.
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Storage Facility Types Defined (Pt 2)
Caverns Caverns are mined or leached hollow
spaces underground, and include salt, either in
bedded salt formations or in salt domes, or
mechanically competent rock caverns, including
one former coal mine. Caverns are excellent for
cycling applications since they operate as
pressure vessels. Cushion gas requirements are
generally lowest for these facilities, averaging
about thirty-three percent of the total gas
volume. In addition, the physical development
time for these facilities is typically one to two
years. The primary disadvantage is the higher
cost, both for development and to use. Higher
user costs can be mitigated by using the caverns
flexibility for multiple cycles. Surface
Facilities Surface storage facilities include
LNG, Propane, and Propane-air. The capacity is
typically sufficient for five to fifteen days of
needle-peak shaving. The advantage is the
on-site availability of the natural gas. The
disadvantages are the high cost to develop. In
addition, these facilities have limited capacity,
ranging anywhere from 0.5 to 2.0 Bcf.
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• Types of Storage Being Planned
• In the past, utilities and LDCs were most often
  satisfying seasonal storage demand.
  Consequently, single-cycle depleted reservoirs
  and aquifer storage were the vast majority of
  storage facility designs.
• As storage development has migrated to
  independent or third-party developers and
  market-based rate systems, and with the advent of
  the NYMEX Gas Futures trading market, the
  emphasis has shifted from the seasonal storage to
  the high deliverability storage facilities (read
  multi-cycle).
• Currently, the demand is for multi-cycle storage
  facilities with the ability to capture daily, if
  not hourly, price arbitrage. Consequently, new
  storage development is focused either on cavern
  storage or reservoir with significant compression
  investment and multiple horizontal wells.

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• When To Plan For Storage The Planning Schedule
• Pre-public Activity
• Geological/Technical Analysis
• Feasibility Study
• Market Study
• Public Activity
• Commercial Assess Market Demand by conducting an
  Open Season
• Local Support Development
• Environmental
• Regulatory file the necessary applications with
  the appropriate jurisdictional agencies
• Financing
• Construction

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• Storage Development Minimizing the Cost
• Internalizing specific procedures, processes, and
  development tasks, such as procurement
  responsibilities, can reduce the cost of
  contractors.
• Risk Cost. Higher risk equates to higher
  costs. By assuming more of the project risk, a
  developer can mitigate their third-party costs.
  With Lump Sum/Turnkey/EPC contracts sticker
  price is substantially more than cost-plus
  arrangements.
• Long lag times between the bid deadline and the
  commencement of construction increases
  uncertainty and risk, which translates to higher
  costs to offset the risk. Efficient project
  management decreases overall construction time
  and lowers risk and costs.

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• Geological Engineering Cost Issues
• Avoid the Penny Wise-Pound Foolish syndrome
  concerning engineering costs. The more
  engineering data obtained early in the
  development, the better the project planning
  phase and the less risk later in the project.
• Avoid untested/experimental/cutting edge
  technologies if possible. Tried-and-true
  methods, although not as flashy or as newsworthy,
  are easier to plan, cost, and implement.
• Location and geological opportunity can enhance
  each other. Smaller reservoirs that can be
  cycled at or near multiple transmission pipelines
  are more desirable.
• Avoid locations that are public-sensitive and
  that will present a NIMBY challenge, such as
  trying to build a storage facility under a Sierra
  Club regional office. These sites will entail
  longer legal procedures, higher costs, and face
  the increased probability of a failed development.

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• Conclusions
• Storage development will benefit from reduced
  steel costs, declining rig rates, reduced base
  gas cost, and potentially similar saving in other
  project capital costs.
• Assuming storage rates remain constant (i.e.
  volatility remains constant) storage development
  should again be a profitable undertaking for all
  types of developer.
• Vendor and developer collaboration will reduce
  cost uncertainty, but the key issues remain
  detailed planning and early engineering to
  minimize change orders.