A new Calgary gas-storage company plans to invest hundreds of millions of dollars in a bid to help producers hedge against volatile winter and summer gas prices.
Rex Kary, president and CEO of Moneta Gas Services, predicts demand for storage will increase as winter and summer gas prices remain highly volatile over the next decade, and more liquefied natural gas (LNG) enters the North American market from overseas.
"We believe that natural gas in North America is depleting, and will continue to deplete," says Kary, a veteran gas marketer. "Yet, the demand is increasing."
Demand has traditionally peaked in cold winter months when people use home-heating systems more often, but it has also increased in summer as gas-fired electrical plants provide power for air conditioners and other equipment.
Kary says Moneta's financial backers - Yorkton Energy Partners LLP, a $2.7-billion private equity fund that invests exclusively in energy assets, and E&C Capital, an energy and commodities private-equity group with global bank BNP Paribas - want the firm to become a significant player in Canada.
Moneta plans to acquire depleted reservoirs and build or purchase pipelines and related infrastructure as it aims to store 50 billion cubic feet (bcf) of gas near producing areas.
Gas will be stored in salt caverns and other facilities, and moved to and from reservoirs via pipelines. Such methods, which began in the Welland, Ont., area in 1915, are common, but Kary says Moneta is among just a few independent Canadian storage companies.
In the past, he says, most storage facilities were operated by producers, pipeline firms and utilities, but they have reduced their involvement in storage in recent years.
"We are probably a little bit more open to the concept of partners," says Kary, explaining the difference between his firm and other storage operators.
North America now stores 3.5 trillion cubic feet (tcf) of gas per year, but Canada houses only 0.5 tcf while the rest is held in U.S. locations.
LNG imports, which are expected to account for 15 per cent of North American supply by 2020, are already starting to boost prices in B.C. and Alberta as they begin to impact the New York Mercantile Exchange (NYMEX).
"This is just looking at the infrastructure to meet the (gas-supply) needs of North America," he says. "Moneta will be just one small player."
The company will lease storage capacity to producers for their own purposes and also use facilities for gas that it sells on its own.
Moneta will purchase some of the gas from producers to sustain the reservoirs, because some gas is required to maintain adequate pressure that enables fuel to flow in and out of salt caverns and other underground locations more easily, depending on each site's geological characteristics.
Kary says the operation will enable producers to earn revenue for their gas more quickly.
"It's not a question of how much we're investing," he says. "It's a question of how big we can make (total storage)."
He says any party entering the storage market looks to invest a minimum of $100 million. Each project can range in price between $100 million and $1 billion.
The firm plans to acquire assets in both Western Canada and Eastern Canada. It has started leasing facilities, trading gas and contracting services, and held discussions with a pipeline company about a possible partnership on a new or existing line.
Kary says the company will likely bid on Chevron's Aitken Creek facility near Fort St. John, B.C., which has a capacity of 70 billion cubic feet (bcf) and is expected to fetch a price in the $1-billion range.
Since Kary says Moneta won't invest $1 billion in a project, that likely means the firm will partner with other industry players. A large producer or pipeline company would be a logical partner, given the large investment required.
The B.C. Utilities Commission (BCUC) has granted Aitken Creek, considered the province's only world-class storage facility, an exemption on regulations that set the storage fees that it charges producers. The BCUC regards Aitken Creek as a utility that does not unduly affect the price of gas in the province.
Considering the volatility of gas prices, increased storage "makes absolute good business sense," says Michal Moore, a senior fellow with the Institute for Sustainable Energy, Environment and Economy at the University of Calgary. "Storage is a very thoughtful and logical next stage," says Moore, former chief economist with the U.S. National Renewable Energy Laboratory in Golden, Colo.
He says storage capability will become a tradeable item as the North American industry attempts to meet growing demand for gas in wake of declining reserves.
"(Natural gas) is plentiful worldwide, but it's not plentiful in regional pockets," he says.
"The only way to bring that (North American) supply up is to start going to a world of LNG."
But Moore says North American gas will likely remain cheaper than LNG for some time. Like Kary, he believes that Canadian storage facilities will likely increase.
Moore notes gas does not just need to be stored underground. It can also be stored in pipelines, with line pressures increased to boost capacity.
Although storage facilities have environmental issues that need to be addressed, Canadian companies have experience and know how to store gas safely, he adds.
"This (launch of Moneta) is a reflection of the changing world."
But Moore would rather not tackle the question of just how much gas might cost. "It's just the most volatile of all fuels," he says.
"Will there always be a (price) fluctuation between summer and winter? I say: Absolutely, yes. Will it be big or small? I don't know. Nobody that I know ever makes that guess and wins - unless they get lucky."
Moore says gas is an important part of an integrated North American supply that should also include coal. But he says renewable sources can also help boost supply.
"If I look ahead 20 years, the people who are saying we don't need alternative energy sources, that's just silly," he says. "Why don't we have as diverse and robust an energy supply as possible?" Greg Stringham, vice-president of the Calgary-based Canadian Association of Petroleum Producers (CAPP), says there is no great need for storage in Canada - unless it is very regional. Noting that gas prices have been flat in recent years, he says there appears to be a good balance between supply and demand.
"Because storage is so full right now, people who are looking through the winter have said we've got enough gas in storage to be able to meet almost the coldest winter out there," says Stringham. "At this point in time, it looks like there is relatively adequate storage."
Some areas, like the B.C. Lower Mainland, are exceptions. Vancouver, he says, has very little in the way of storage facilities. He notes some Canadian gas is shipped into storage in the U.S. and then back in Vancouver when needed.
The ultimate test of storage, he says, is whether you would have enough gas in storage if the price remained the same all year round.
He says the need for storage will become greater if more summer and winter demand peaking occurs, and industrial demand, which is flat year-round, drops off as companies locate plants outside Canada.
Meanwhile, a series of underground storage caves for natural gas have passed the initial environmental approval stages in Nova Scotia.
Calgary-based Landis Energy Corp. has received a Class 1 environmental clearance for caverns near Alton, in central Nova Scotia.
After the initial assessment, Environment Minister Mark Parent had asked for more detailed information from the company on the impact of discharged salty brine into nearby rivers. Concerns had been raised about the impact on fish habitat and spawning.
Landis has provided further information, and Parent has now approved the plan subject to the company developing an environmental plan.
The storage system proposed by Landis would use piped-in river water to hollow out the caves, treat the water to reduce its salinity and then discharge the briny water back into the river.
- with files from The Canadian Press (Monte Stewart can be reached at monte@businessedge.ca)
