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Economics of Underground Gas Storage

Harold E. Schwalm, SPE-AIME, Northern Illinois Gas Co.

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Introduction
Most natural gas distribution companies have been
{aced with the problem of obtaining gas supplies to
meet increased winter peak loads. There are several
possible alternatives that companies may take to aid
in meeting the peak demands:
1. Contract for additional pipeline flow gas.
2. Contract for peak-shaving service.
3. Develop storage or peak-shaving facilities.
4. Do nothing and quit growing.
If companies clearly understand their sales load
and the availability and economics of the various
peak-shaving methods, then the choice of alternatives
should be easy.
The current short supply of gas is a factor that ex-
e.rt~ great pre~~~re for .rnQre efi.~ien~ lu~e of f~e]e -A.f
the same time, it may be the factor that limits the de-
velopment of peak-shaving facilities or of under-
------
g[ UUIK! StOiZi& d &S.
age is triggered by the variations in weather (daily,
monthly, or seasonal) and the volume of gas required
to satisfy space-heating customers. Space heating
constitutes a large segment of the distribution com-
pany’s market; consequently, the variation in weather
causes a variation in load or sales. The greater the
change in weather, the more ditlicult the problem of
operating the company (system) at high efficiency.
This efficiency is commonly referred to as load factor,
which is the annual volume of gas purchased by the
distribution company divided by the annual volume
that the pipeline company has contracted to deliver.
Table 1 shows the load factors for the different
sales loads for Northern Illinois Gas Co. Since the
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-- the northern Illinois area these
load factors should be typical of those of a distribu-
tion company located in the midwest climate region.
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This paper does not attempt to solve the supply sales with the highest load factor and the lowest vol-
problem, but it does review the need for load balanc- ume of gas sold. The load factor ranges from 76.8
ing or peak shaving by use of underground storage of percent for residential use to 137 percent for indus-
natural gas. It compares the economics of under- trial sales. The general sales load factor is high be-
ground storage with other meth&ls of peak shaving cause it is independent of variations in weather.
and with pipeline gas costs. The space-heating load is the segment of the com-
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Need for Underground Storage of est volume of gas sold. Note that the space-heating
Natural Gas load factor ranges from 34.3 percent for residential
The storage of gas is needed to increase the efficiency heating to 43.7 percent for commercial heating. Be-
of the gas distribution business. This need for stor- cause the space-heating load is large compared with

The economic advantages oj using underground gas storage to balance variations in gas
load are illustrated here by comparing it with various other approaches: increasing
pipeline flow gas purchases, increasing interruptible sales, and installing LiVG or LPG
peak-shaving facilities. All other methods run a poor race for a return on the
investment dollar.

OCTOBER, 1971 5f7- 1221

 I

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TABLE 1—REVIEW OF DISTRIBUTION COMPANY total company sales, the total company load factor of
LOAD FACTOR 46.0 percent is nearly equal to the space-heating load
Annual factQr: This illustrates Lhe effect Qf weaLhlmvariation
“Load Factor
(percent)
on a distribution company with a large space-heating
Type of Load
load. In the case of Northern Illinois Gas Co., the
General total load factor has been raised to 94.4 percent by
Residential 76.8 the use of underground gas storage.
Commercial 97.0 Fig. 1 shows the effect of the load factor on the
Industrial without off-peak 100.0
cost of gas. As the load factor decreases, the unit
Industrial with off-peak 137.0
~Q~fQf g* increases, The g!~~ increases !es~ r@@
Space Heating in the 100- to 75-percent load-factor range than at
Residential 34.3 load factors below 75 percent. This is a very im-
Commercial 43.7 portant point in controlling gas costs and can best
Total Company be explained by examining the gas purchase con-
Without interruptible and off-peak 42.2 tract. In the case of Northern Illinois Gas Co., the
Without interruptible and with off-peak 43.3 purchase contract is a demand-commodity type of
With interruptible and off-peak 46.0 contract with a 75-percent take-or-pay penalty. This
With storage 94.4 means that the distribution company pays a fixed
yearly charge based on the contract quantity of gas
I , to be purchased. This fixed rate is called the demand
charge and does not vary regardless of how much gas
is purchased.
The commodity charge is the cost of gas actually
purchased by the distribution company. The 75-per-
cent take-or-pay penalty comes into effect if less than
75 percent of the contract quantity is purchased. In
short, the company pays the commodity charge for
75 percent of the contract quantity whether the gas
is taken from the pipeline company or not. Under
this type of contract, load factors of less than 75 per-
cent result in greatly accelerated gas costs.
Fig. 2 is a typical load curve for a cold climate, illus-
trating the extreme variation from summer to winter.
It shows that as much gas is sold in the four coldest
months as is sold during the rest of the year. It also
shows that the peak-day sendout may be seven times
that of an average summer day. Each of these situa-
tions presents special problems. The greater demand
that one or the other imposes may strongly influence
the economics of whatever peak-shaving method is
used, although it will have little effect on the cost of
~~~~~cmmnd
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D-ad cc.,, - 9361McFIY

tidit, Co., - $.251HcF
Take or Pay Penalty- 7S1
Economics of Underground Gas Storage
0 1 The economic advantages of using underground gas
25 50 75

LOAD FACTOR (%)

storage facilities to balance variations in gas load can
Fig. l—Effect of load factor on cost of gas. best be shown by comparing the cost of gas supplied
by various methods. Following are the most common
methods that might be considered by a distribution
company:
1. Develop a dry gas underground storage field.
:~ 2. Develop an aquifer underground storage field.
3. Increase pipeline flow gas purchases.
,
4. increase pipeline flo-w gaa purchases and in-
mo

g
crease interruptible sales.
.
~ ma

t 5. Install LNG &k-shaving facilities.

. bm 6. Install LPG peak-shaving facilities.
~
~
: .,, To illustrate the economics of underground gas stor-
; age, let us evaluate the case of the XYZ company.
W+ Because of an increase in space-heating load, this
example company needs to increase its peak-day win-
~ ,“. , ,,” ! t,! ! e“,, ! my , ,,,., r .“”-, , ,1. , ,- , ~, , ~, , ,,, f~r Sendmlf @ j 00 MMcf,/D attd increase ifs ~~~-
Fig. 2—Typical load curve. sonal peak-shaving sendout by 3.0 Bcf. To simplify
1222
the study, it is assumed the company has a current
load factor of 90 percent so that the effects of any
pipeline contract penalties do not have to be consid-
ered. The demand-commodity contract prices are
$36/Mcf/year and 25 $/Mcf, respectively. The price
that the company charges for interruptible gas is 12
percent above the commodity cost, or 28@/Mcf. The
calculated costs of gas for various methods of peak
shaving are given in the following sections.
Underground Dry Gas Storage Field
The average investment cost for this type of storage
was $1.23 per Mcf of top storage, and the average
operating costs are for both large and small fields and
thus may be high or low with respect to the size of
any particular field.
Table 2 shows the calculated costs for storage in a
dry gas field. The total annual cost of supplying 3.0
Bcf of gas is $1,453,500, or 48@/Mcf.
Underground Aquifer Storage Field
The average investment cost for aquifer storage was
$1.49 per Mcf of top storage, and the average oper-
ating cost was 8@/Mcf. In general, the aquifer stor-
age costs are higher than dry gas field storage costs
for the following reasons:
1. Aquifer stOrage ----- .- —-
requires Coiisideratily more ex-
ploratory and development work to prove the geol-
ogical requirements for storage.
2. In dry gas storage, a portion of the cushion gas
remains at small or no cost at the time the field is con-
verted to storage.
3. Aquifer operating costs are higher because of
the larger quantities of water that must be handled
during withdrawal operations.
Table 2 shows the calculated costs for storage in
an aquifer field. The total annual cost of supplying
3.0 Bcf of gas is $1,660,500, or 55@/Mcf. These
costs are about 14.5 percent more than the calculated
costs for storage in a dry gas field.
Increase m Daily Pipeline Supply
The easiest method of increasing peak-shaving capa-
city (assuming no shortage of gas supply) is to con-
tract for more pipeline flow gas.
Table 2 shows the calculated annual cost of in-
creasing the purchased gas by 100 MMcf/D. The an-
nual cost of supplying 3.0 Bcf of gas is $4,350,000,
or $ 1.45/Mcf. This is 3.0 times the cost of dry gas
storage and 2.6 times the cost of aquifer storage,
Increase in Daily Pipeline Supply and
Increase in Interruptible Sales
This scheme involves increasing the pipeline flow gas
and selling to interruptible customers all gas not
needed for seasonal peak shaving. The effect of this
is that the cost of gas used for peak shaving will be
partly offset by the net revenue from interruptible
sales.
Table 2 shows the calculation of gas costs under
this scheme. The net revenue obtained from inter-
ruptible sales is calculated by assuming that all gas
not used for peak shaving — that is, 33.5 Bcf — is
sold at 28@/Mcf, or 3@/Mcf above the pipeline com-
modity cost. The resulting net revenue is $1,005,000,
which reduces the annual gas costs from $4,350,000
to $3,345,000, and the unit cost from $ 1.45/Mcf to
$1. 12/Mcf.
It is interesting to note that the sales price of inter-
ruptible gas would have to be raised by 32 percent
over commodity costs, or to ~~@~M-Cf, before this
scheme would be as economical as aquifer storage.
The resulting net revenue required would be $2,689, -
500. The sales price would have to exceed commodity
costs by 34 percent before this scheme would be as
economical as a dry gas storage field. The net revenue
required in this case would be $2,896,500.
LNG Peak-Shaving Facilities
Most of the investment in an LNG plant is for storage
and liquefaction facilities. Since these facilities are
sized according to the estimated seasonal require-
ments, it is very important that seasonal peak-shaving
requirements not be overestimated.
Table 2 shows the calculations of annual gas costs
for LNG peak-shaving facilities. It was assumed that
the LNG storage facilities would hold one season’s
peak-shaving requirements, or 3.0 Bcf. The lique-

TABLE 2-COSTS TO PROVIDE PEAK SHAVING OF 3 Bef PER SEASON AND 100 MMef/D

(1) (2) (3) (4) (5) (6)

.Ann!lal
.. .. . . . . Carrwinm
-- ..,...= AnnIIsl
,.. ...””. Annt,nl
,.,,,,””,
ComC~::ity oprpllg Net Total
Method Used Investment Deman~Charsze Annual Cost
Dry gas storage $3,690,0W $750,000 $150,000 $1,453,500
($1.23/Mcf*) (0.15 ~5%?;? (25@/Mcf) (5@/Mcf*) (48#/Mcf)
Aquifer storage 4,470,000 670,500 750,000 240,000 1,660,500
($1.49/Mcf) (0.15 X Col. 2) (25@/Mcf) (8@/Mcf*) (55@/Mcf)
Increase pipeline supply, — 3,600,000 750,000 — 4,350,000
no interruptible sales ($36/Mcf) (25#/Mcf) ($1.45/Mc9
Increase pipeline supply, 3,600,000 750,000 3,345,000**
interruptible sales ($36/Mcf) (25@/Mcf) ($1.12 /Mcf)
(33.5 Bcf)
LNG facilities 13,300,000 1,955,000 750,000 300,000 3,045,000
(0.15 x Col. 2) (25f!/Mcf) (lO@/Mcf) ($1.02/Mc9
LPG facilities 4,500,000 675,000 3,000,000 300,000 3,975,000
(0.15 x Col. 2) (10#/Mcf) ($1.33/Mc9
‘FPC figures reported for 1968.
..lncludes $1,005,000creditfor interruptible sales at 3@/Mcf above commodity cost

OC’FOBER,1971 1223
 TABLE 3-COMPARISON OF ANNUAL COSTS OF GAS FROM VARIOUS PEAK-SHAVING METHODS

Increase Increase pi~eline SumlY

DN Gas Aauifer PiDeline and ““- LNG LPG
Davs
—-o- %rage St&rage supply Interruptible Sales Facilities Facilities
f Use ($/Mcf) ($/Mcf) ($/Mcf) ($/Mcf) ($/Mcf) ($/Mcf)

1 5.84 7.04 36.25 26.20 20.30 7.85

2 3.07 3.68 18.25 13.23 10.33 4.46
3 2.23 2.83 12.25 8.90 7.00 3.35
4 1.68 2.01 9.25 6.74 5.34 2.79
5 1.41 1.67 7.45 5.44 4.34 2.45
6 1.22 1.45 6.25 4.57 3.67 2.23
7 1.09 1.29 5.39 3.96 3.20 2.06
a 0.99 1.17 4.75 3.49 2.59 1.94
9 0.92 1.07 4.25 3.13 2.56 1.85
- -. . . . -. . . - . ..- m a. , -e
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15 0.67 0.78 2.65 1.98 1.68 1.55

20 0.58 0.67 2.05 1.55 1.34 1.44
25 0.52 0.60 1.69 1.29 1.15 1.37
30. 0.48 0.55 1.45 1.12 1.02 1.33
*From Table 2, Column 6.

faction rate of 15 MMcf/D was determined by as- may eliminate underground storage as a means of
suming that 200 days would be available for lique- peak shaving. Its use is also precluded in areas where
faction. Tine calculated annuai costs are $3,045,000, the popuiauon is dense.
or $ 1.02/Mcf. This LNG cost is 85 percent higher The use of LNG or LPG for peak shaving would
than aquifer storage costs and 110 percent higher certainly be more desirable economically than in-
than d~ gas field storage costs. creasing the pipeline supply. One major disadvantage
of LPG may be the scarcity or unpredictability of sup-
LPG Peak-Shaving Facilities ply.
Table 2 shows the calculated annual cost of gas sup Table 3 shows the effect of use on the cost of gas
plied from LPG facilities. The cost factors used in supplied for peak shaving. Certainly, the more in-
estimating plant investment and operating costs were tense the use of the facility, the less the cost of gas
obtained from Heath. * The annual cost for supply- supplied. In our example, LPG facilities would be
ing 3.0 Bcf is $3,975,000, or $1 .33/Mcf. No allow- more economical for 20 days’ use than LNG. After
ance was made for inflation of costs from 1966 to the 20 days, LNG is more economical. Underground
present time; thus, the annual gas costs may be even storage is more economical than LNG or LPG even
higher for LPG. on a 1-day basis. This picture might change, of course,
if the LNG or LPG plant were designed for 1-day
Comparison of Costs usage. This relationship can vary, depending on the
Column 6 of Table 2, listing the annual and unit costs ratio of daily peak shaving to seasonal peak shaving;
of gas supplied through various means of peak shav- also, the economics will vary depending on a parti-
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economical. Unfortunately, economics is only part

of the picture. The lack of depleted gas fields or of f~rig~~al Ma.nuacript received in Society of Petroleum Engineers
the geological conditions necessary for aquifer storage office March 1, 1971. Revised manuscript received July 31, 1971.
Paper (SPE 3288) was presented at SPE Midwest Oil and Gas
Industry Symposium: held in Chicago, April 1-2, 1971. @ Copyright
*Heath, C. C.: “Propane-Air Peak Shaving Economics,” Peak 1971 American Institute of Mining, Metallurgical and Petroleum
Shaving, American Gas J. (Feb., 1966). Engineers, Inc.

1224 JOURNAL OF PETROLEUM TECHNOLOGY