April 2009 Vol. 236 No. 4

Features

Pivotal Energy Builds Up Its Gas Storage Portfolio

Late last fall, Pivotal Energy Development began construction of Golden Triangle Storage, a 12-Bcf natural gas storage center that is located in and on top of the historic Spindletop salt dome near Beaumont in Southeast Texas.

With the drilling of the first cavern well completed, Pivotal is now in the midst of completing a second cavern well. The developers have also completed installation of water-handling facilities and leaching operations on cavern one have started. Through mid 2010, Golden Triangle will pump water into the first cavern well, dissolving the salt, and remove the resulting brine to create the approximately 1,500-foot tall, 300-foot diameter cavern. Brine is transported by pipeline to four disposal wells drilled nearby where it is injected into salt water-filled formations almost 8,000 feet below the surface, according to Pivotal.

Pivotal, a Houston business unit of AGL Resources that is headquartered in Atlanta, expects the first cavern to begin commercial operations the summer of 2010 with the second cavern coming online in 2012. The two caverns can each be expanded up to 8 Bcf of working gas. The storage center itself can expand to more than 36 Bcf by adding caverns as dictated by market conditions.

“Golden Triangle is uniquely positioned at the intersection of growing natural gas supplies and the infrastructure that deliver it to market,” explained Dana Grams, president of Pivotal Energy.

“The area will see increased supply inflows from shale gas and LNG imports as well as from conventional sources,” he continued. “Golden Triangle provides a convenient parking place for these supplies and connects to diverse markets through three intrastate and three interstate pipelines. As a high-deliverability facility, we will be able to inject up to 300 MMcf/d and deliver up to 600 MMcf/d.”

A nine-mile dual pipeline header system will connect storage to Florida Gas Transmission (downstream of station 6), Texas Eastern Transmission (WLA pool), Centana Pipeline, Energy Transfer’s Texoma line, Kinder Morgan Texas and ExxonMobil’s Golden Pass Pipeline. Future plans may include Enbridge’s Clarity line from the Barnett Shale in East Texas.

Pivotal was established in 2003 by former AGL CEO Paula Rosput in an effort to build up the holding company’s midstream natural gas portfolio. Today Pivotal also owns and operates Jefferson Island Storage & Hub in Louisiana and Pivotal Propane of Virginia. Jefferson Island was acquired from AEP in 2004 and includes two salt-dome storage caverns under Lake Peigneur that have been operating for over a decade. AGL is hoping to settle a lease dispute with the state of Louisiana to proceed with plans to expand the site. Jefferson Island’s caverns offer 7.5 Bcf of working gas capacity, 720,000 MMcf/d withdrawal capacity and 360,000 MMcf/d injection capacity.

In an interview with P&GJ, Grams discussed the company’s strategy, particularly in regard to storage assets.

P&GJ: How would you describe your natural gas strategy, especially in relation to Golden Triangle?

Grams: It all has to do with the fundamentals of the market. We believe there is very strong demand for rapid-cycle natural gas storage. The first part of our plan is to find a producing-area hub, which I liken to a farmer’s market where there are plenty of buyers and sellers who come together. There is pipeline capacity to and from; there is a header facility that connects that pipeline capacity. Ultimately, we would like to launch an index point that people can base future business upon and that would add long-term value to our facility. Storage is a critical component of that concept.

P&GJ: Since you are adjacent to a national historical site at the Spindletop discovery well, what are some of your environmental considerations?

Grams: There are a lot of environmental considerations for Golden Triangle. The wetlands issue is one, but what really stood out was the fact that the Spindletop gusher of 1900 is right off of our footprint and the ensuing boom left historical artifacts throughout the site that we had to be very mindful of. We’ve dealt extensively with the State Historic Preservation Office and the Texas Historical Commission; their acknowledgement of our work plan was a condition of our FERC certificate.

The agreement was that when we find significant artifacts, we’ll do a dig and try to preserve them. We’ve designed the project to stay away from the parts of the lease that we thought would have the heaviest concentration of artifacts. We’ve tried to avoid that extra expense of stopping work and having to do an archaeological excavation.

P&GJ: What are the challenges and opportunities of storage in today’s low-price market?

Grams: There is no direct relationship between the price of natural gas and the value of storage. The value of storage is historically based upon seasonal spreads.

Jefferson Island represented an opportunity for us to capture peak demand and cash prices that exceed the NYMEX prices. So in times of hurricanes or very cold weather, the cash price may go a couple of dollars over the next month’s future price, and that we consider our peak demand. That’s more of a Lotto ticket concept – if it peaks, you’re in the right place at the right time.

We took a different point of view with Golden Triangle. The fundamentals of the market suggested to us that this was the area of the Texas Gulf Coast where LNG was going to be most concentrated when it comes to our shoreline. We believe it has to. We want to participate in a service that is more designed for operational considerations and price protection instead of the Lotto ticket concept. When we heard ExxonMobil was executing the Golden Pass project (recently delayed), we were convinced that they were a leader in LNG. So we looked in Southeast Texas for an opportunity and found Golden Triangle.

We were convinced that there was going to be domestic production coming from the state of Texas that was augmented by tight-sands and shale production and then on top of that we were going to see LNG deliveries. All of these things coming together in this region were going to create congestion.

There certainly is a strong need for more takeaway from the area. But say you’re bringing in ships full of LNG at whatever time of the market that is right for you – if it’s summer, ships are arriving. But it starts raining and the electric demand for air conditioning drops off 25%, nobody turns the ship around. If the ship arrives Saturday morning while the market is balanced with supply and demand from Friday’s trading, you may see significant price declines to be able to move that cargo. We think that high-deliverability, rapid-cycle storage is the place where we want to be.

We don’t see producers shutting in at $5. But I think shale gas is challenged at $5. During this financial crisis, many of the shale producers have lost significant value in their stock. With the price falling, then to shut volumes in, adds insult to injury. I don’t expect there will be enough widespread shut-in to make much difference in this market. If you shut it in now, those volumes go to the end of the line and you won’t get that money for another five or ten years. It just doesn’t seem worth it.

P&GJ: What is the value of your salt-dome storage?

Grams: The nice thing about salt-dome opportunities is that you have multiple caverns that are typically sequential which provides a long development time. Golden Triangle can spend eight to ten years in development, depending on market conditions.

We’re in the middle of clearing up some issues with Louisiana over title to our mineral lease on Jefferson Island. If it is resolved, expanding that site will be our No. 1 priority. We see the greatest value there since the majority of the infrastructure is already in place. The cost to add new capacity is probably around 50% of what it would be to develop greenfield.

We previously estimated the costs to develop Golden Triangle at around $265 million, but there are a number of variable costs such as labor, materials and pad gas that can change the estimate. The cost of pad gas (the amount of permanent gas required to keep a cavern operable) is lower now, but we have seen increases in the costs for labor and materials that could increase the overall construction cost by another 10-20%. Each cavern, with an initial working gas capacity of 6 Bcf, will require about 3 Bcf of pad gas.

With today’s uncertainty you have to have a very strong commitment to this business and what goes with that is a fundamental belief that you’re in the right part of the midstream value chain.

P&GJ: What is your perspective of the natural gas business today?

Grams: We believe that the natural gas market is facing uncertainty as it often does every 20-25 years. The places where we get our supplies are changing. Traditionally it was the Gulf of Mexico, both on and offshore; Permian Basin in West Texas and the Anadarko Basin in Oklahoma. We’re seeing new trends in shale that suggest gas is in different places in the Rockies, Bossier Sands, and Barnett Shale where infrastructure is not plentiful. We see the need for more and more pipeline infrastructure to match up with the new supply basins. We also see the peak nature of our business increasing.

At our utilities, we have relatively flat demand per customer. The peak day is growing by about two and a half times faster than our overall demand. People are building bigger and bigger houses that are very efficient in terms of insulation until about 25 degrees F. At that point, you suddenly lose efficiency and have a much bigger house to heat. Therefore, you need much more energy for those peak days.

We see industry going offshore, so the overall natural gas market is far more exposed to weather-sensitive market loads instead of industrial baseload markets. This peak in the market is something that we see will continue to grow: the summer peak growing faster than the winter peak because of electrical generation switching to natural gas as a preferred fuel. We believe that is a trend that will continue as the electric market grows. We believe the majority of that growth will be met by natural gas-fired projects.

Generation is not being built right now, so most of the peakers will become more baseload as electrical demand grows. Most of the units that are less efficient and only run occasionally will become the peakers. If you need more electricity, you’ll probably build natural gas-fired facilities. Coal seems out due to its carbon footprint and nuclear is a long time before it actually goes into service. So the bridge fuel is natural gas. But the electricity market is extremely volatile – the differences between night and day, peak and non-peak hours, is something that is going to have ramifications in the natural gas business.