I am retired and take educated guesses on all things financial.

January 15, 2007

January 16, 2007:Natural gas education 101, storage.

The team at CSFB has published an extensive and interesting report on an under-reported and important aspect of the natural gas industry: natural gas storage.

The major use for a storage facility is to improve reliability during the peak seasonal winter demand period. Storage "is gradually injected through the shoulder (low demand during spring and fall periods) and summer months, and subsequently withdrawn through the winter months of November through March".

Natural gas can be stored underground in depleted reservoirs, aquifers and salt caverns. Depleted reservoirs make up the bulk of underground storage capacity in North America because they are the most economical. Aquifer storage requires considerable investment. Salt caverns are the least common and require the hollowing out of a storage area within a salt dome through the injection of water and removal of salt with the water." Natural gas storage is divided between working gas and base gas. Working gas is the volume of natural gas that may be removed from the facility. Base gas represents the volume of natural gas that must remain within the storage facility to provide minimum pressure necessary to remove the working gas".

Much has been made about the Canadian Oil Sands in Alberta, Canada. However, natural gas is an even bigger story from that region. Due to substantially higher market value for gas storage services, Alberta Province continues to be a very attractive place to develope gas storage. To date, storage capacity amongst the seven facilities is 336 Billion cubic feet of gas. In 2005, it was 250 Billion cubic feet. The fundamentals for natural gas appear very attractive now. With increasing price volatility, storage is a compelling alternative to burn off or "drill high/sell low". Storage in upstream Alberta is useful when there is excess pipeline capacity. And, owning energy assets such as storage provides an informational advantage about the natural gas market. A huge gas field from the MacKenzie Valley and from proved gas fields in Alaska will enhance Alberta's importance further as a natural gas storer as well as producer.

The company best positioned to profit from gas storage in Alberta is TransCanada. In 2007, TransCanada will be able to store for themselves and for third party "renters" 130Billion cubic feet of gas. This presents an excellent revenue stream for TransCanada, and may be upwards of 12% of their earnings this year and an increasing percentage beyond. The rates and services associated with underground storage facilities in Alberta are market based. TransCanada does not take any commodity price risk on third party rent transactions.


It gets a bit more complex, but the essence is that natural gas storage is important and under-reported. TransCanada is the best play in the storage capacity universe, and growing. Alberta will be an even greater pipeline and storage hub for natural gas in the future. And, there is a lot of money to be made holding gas seasonally.

TransCanada (TRP) is an excellent stock to consider this spring, when natural gas equities are out of favor due to sector rotation. For your fixed income portfolio, TransCanada's 8.25% preferred 2047 (TCA.PR) trading at 25.87/share yields 7.97%.

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