Development of new gas-storage fields, which had languished because of utilities' reluctance to commit to long-term contracts, is being rejuvenated by venture capitalists, new industry partnerships and institutional funds. These new players seem willing to take risks that most utilities and conventional lenders would not. It's a good thing, because the Gas Technology Institute now projects that in the next 15 years, U.S. gas storage capacity will grow 21% to 4.6 trillion cubic feet. About 75% of the capacity additions are expected to occur after 2005. Most utilities-uncertain of the timing for retail competition and the regulatory framework-have hesitated to commit to anything long-term, including storage and new electricity generation. But since utilities were the major customers for storage, without their commitments storage developers were unable to get project financing. Many new projects remained dormant. For the past few years, most improvements in the storage infrastructure came from expanding existing facilities, with the goal of increasing the speed of injections and withdrawal for quicker turnaround, resulting in greater flexibility for users, explains storage developer Craig Taylor, president of HNG Storage. Now a few storage developers are attempting to break the financing impasse. And, many of them are gas marketers and pipelines, not utilities. Heading new companies, they are taking on risks themselves, as well as recruiting industry partners and institutional funds. These are people who made their mark in building some of the first independent, or third-party storage facilities in the aftermath of FERC Order 636, which mandated open access to gas pipelines. Developers of power-generation facilities are often taking an equity interest in the storage project. Nonutility generators and some nonregulated utility subsidiaries, eager to participate in a more competitive world, are partnering also. Creative financing has come to the fore as the need grows more defined. The Gas Technology Institute (created by the merger of the Gas Research Institute and the Institute of Gas Technology) now predicts increasing storage capacity from 3.8 trillion cubic feet to 4.6 Tcf by 2015 would require an average annual investment of about $270 million. Storage developers privately dispute that projection, noting that emphasis will remain on increasing total deliverability, rather than capacity volumes. A study conducted by Houston-based International Gas Consulting, on behalf of GTI, reveals confidence among roughly 150 storage customers who responded that storage will be there when needed. IGC estimates survey respondents represent 75% of the gas consumed in the U.S. Key findings: most respondents expect load growth, growing demand for storage, and greater attention to cost control. Location of storage relative to market demand is becoming less important than location relative to the pipeline grid, meaning storage users have confidence in the pipeline system. "Currently, most gas customers believe that capacity will be made available when and as they need it. This represents a significant shift in power from developers to customers, who are becoming less likely to feel the need to commit to capacity ahead of demand," says Ken Beckman, owner and president of IGC. Changes ahead Contractual control of existing storage capacity is about to change dramatically. More than half of the storage contracts that were in effect in the spring of 1999 will expire by 2004. By 2006, 70% of existing contracts will have expired. Storage operators will generally be replacing storage contracts negotiated with utilities-with guaranteed rates of return that enable them to pass on fuel costs-with contracts negotiated by gas marketers. Storage companies fear that as marketers, who operate on thin margins, control more of the storage, they will put downward pressure on storage prices. Others note that marketers think short-term, and may often find themselves in situations in which they are willing to pay a premium for storage, if they can get the gas on extremely short notice. Marketers and other price-arbitrage players are not as concerned with the gas price, as with the difference between prices of gas and electricity. Utilities' reluctance to build new power plants gave rise to opportunities for developers of merchant plants or "peakers." This is electric generation built by independent, nonregulated organizations other than utilities to meet demand above the base load. After numerous nonutility electricity peaking generators were built, it became apparent that without the ability to control the hourly price swings (through controlling hourly storage), the economic value of the electricity-generating facilities was greatly diminished. The objective is to control gas storage-and buy gas low and sell electricity high. "Electric peakers have economic value only if hourly price swings of gas and electricity do not correlate," says storage developer Larry Bickle, the former head of Tejas Power, which created Market Hub Partners (recently acquired by Duke Energy from NiSource). "Whoever controls the hourly swing gas gains the advantage. Having hourly storage capability is essential," Bickle says. "Electric generators want direct connections to the storage itself." Venture capital teams Haddington Ventures represents the new breed of developers. Started by Bickle and longtime partners John Strom and Chris Jones, HV is developing storage and other energy assets. The partners have assembled a team of venture capitalists, and entered into partnership with Chase Capital Partners to form Chase/Haddington Energy Partners, focused on providing equity to energy projects. Haddington has a second, parallel investment fund, Haddington Energy Partners. Partners in that fund include Prudential Insurance, Travelers Insurance, Vectren Corp. (formed by the merger of Indiana utility holding companies Indiana Energy and Sigcorp, formerly Southern Indiana Gas & Electric Co.) and UniSource Energy (which includes Tucson Electric Power; Nations Energy Corp.; and Advanced Energy Technologies, among others). The new projects will be built without long-term contracts, but smart equity money will be put into worthwhile projects. "With Tejas Power we had a lot of ideas and had to look for money. Now, we have lots of money and are looking for good ideas," Bickle says. Initially, the partnerships had $77 million to invest. Pleased with the first round of investments, a second round of funding was forthcoming. Together, Chase/Haddington Energy Partners and Haddington Energy Partners have $224 million of equity for energy projects. The company has invested in gas storage, electrical storage (by using compressed air storage, dispelling an old truism that electricity can't be stored), cogeneration, gas gathering and fuel cells The Chase/Haddington Energy Partners' "portfolio company" for developing gas storage projects is Western Hub Properties (WHP), headed by Tom Dill, who was manager of storage sales for Market Hub Partners. Dill says WHP "plans to become the largest independent storage provider to the emerging power market, by offering high-deliverability storage facilities, and locating them where the power grid has the greatest need for swing gas." WHP plans three gas-storage projects, all depleted reservoirs in various stages of development, each located where they can serve a number of power generators. The Lodi project in northern California will hold 12 Bcf of gas. It will be in service by winter 2001. A second project, CenTex, is planned near San Antonio, Texas. The initial phase will have 8- to 20 Bcf of capacity. Mid-2001 is the projected start-up date. The third project, Wheeler Ridge, calls for development of a 14-Bcf facility in Kern County near Bakersfield, California. The former chief executive officer of Market Hub Partners, Don Russell, along with other former officers of that company, has formed SG Resources, to offer a range of technical services for clients who either own or plan to operate storage facilities. It handles the development phase, such as identifying the proper geological location, feasibility studies and permitting. Although there is no formal relationship between SGR and Chase/Haddington Energy Ventures, Bickle says the two businesses are complementary, with one offering development and planning expertise and the other, financial strength. Veteran storage developer John C. Thrash and his son, John F. Thrash, through their company, eCorp, and special-purpose companies or affiliates, plan to own and operate a storage and related electric-generating facility in Tioga County, New York. An eCorp company, Central New York Oil & Gas Co., is developing the facility by converting a gas producing field known as Stagecoach, into a storage field. The 10-Bcf, depleted-reservoir storage field is expected to cost $75- to $80 million and begin operation in summer 2001. It will supply gas to a 520-megawatt power plant to be constructed by another eCorp company, Twin Tier Power, just four miles from the storage facility. The projects are the fulfillment of a 1995 alliance with eCorp, NJR Energy Services Co. (a subsidiary of New Jersey Resources Corp.) and Energy Ventures Analysis, an energy consulting firm. The companies plan to develop strategically located midstream energy assets including storage, pipelines and power plants. NJR Energy Services will provide storage marketing, transportation management and gas trading services. EVA will take a minority equity position. CEO John F. Thrash says the eCorp family of companies can self-finance the storage facility, but will need a "little help" from institutions and investors to finance the $300- to $330-million power plant. John C. Thrash, as an officer of Houston Light & Power and later as head of Thrash Oil & Gas Co. and Natural Gas Storage Corp., played an important role in the development of the Bammel, Katy and Rotherwood storage fields in Texas. Another pair of long-time partners and storage developers, Michael Wright and Geoffrey Mitchell, are developing storage in which the main investor is a power-generating company. Thermo Ecotek, a recent acquisition of Thermo Electron, is the primary owner of the Totem gas-storage facility near Denver. The storage project is being developed by Brant Energy, co-founded by Wright and Mitchell, which will be a minority owner, as well as Renegade Oil & Gas (an exploration and production company) and Fairchild & Wells (a reservoir engineering consulting firm). That 9-Bcf, depleted reservoir, targeted to be in service by year-end 2001, would be the first independent storage facility in Colorado. The partners are studying the possibility of building a connecting power plant. Wright and Mitchell were former executives of First Reserve Gas, developers of the Hattiesburg gas-storage facility in Mississippi. They also began the development of the first independent storage facility in California-the Wild Goose storage project-which they sold to Alberta Energy. Another indication that the industry is expecting a spurt in storage activity is evidenced by Schlumberger. Among its recent acquisitions has been S.A. Holditch & Associates, a consulting company that does engineering and reservoir simulation. Veteran storage engineer and analyst Noah Matthews, who came to Schlumberger through its acquisition of Holditch, is in business development touting Schlumberger's ability to handle any outsourced storage-related activity. DRIVING GAS PRICES The American Gas Association's weekly report from its voluntary survey on net gas injections or withdrawals has become one of the most anticipated bits of information in the industry and can often drive Nymex gas prices dramatically up or down. The AGA began conducting the surveys in 1993. Today the industry closely monitors the pace of injections or withdrawals to determine the likelihood that available storage on November 1 of any given year will be 3 trillion cubic feet (Tcf). That figure, which started as a rule of thumb, has turned into an obsession. Any indication from the weekly report that the pace shows a likely deviation, up or down, can cause wild gas-price movement. Industry observers project how much gas is likely to be injected or withdrawn during any given week, a strong indicator of elasticity of demand, and thus the intensity of gas price movement. Traditionally, gas was injected during the summer when prices and demand were low, in anticipation of withdrawal during the heating season. However, as more gas is used for electricity generation and ever-increasing air-conditioning load, gas prices remain high throughout the summer, preventing an opportunity to inject low-priced gas. On September 30, Salomon Smith Barney reported that storage injections during the previous three months had averaged 0.4 billion cubic feet (Bcf) a day-roughly 4% lower than during the same period in 1999-and overall storage levels were about 17% below a year earlier. At press time, it appeared the industry would enter fall with about 2.6 Tcf of available storage, below the six-year average, prompting most analysts to hike their average annual gas-price estimates for this year and next. "This upcoming winter is setting up for a more dramatic shortage scenario with severe upward price spikes," says Raymond James & Associates. "If we enter the winter with only 2.65 Tcf in storage, then it is highly likely that U.S. gas consumers will face regional supply dislocations and severe gas spikes...this could happen even with a substantially warmer-than-normal winter."