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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • Natural Gas Storage - Correlation Between Storage Lows And Peak Injections 28 comments
    Apr 17, 2012 6:12 PM | about stocks: Q, PCXCQ, ACI, ANR, BTU, UNG, USO, WLT, EOG, XOM, BP

    In my article Rebalancing of the US Coal and Natural Gas Industry, I show a chart which shows that the natural has storage low point, and subsequent net gas injection volume before the peak is reached, has an inverse linear correlation relationship, such that of the storage low is lower, more gas will be injected to bring the storage peak up, vise versa, if the storage season begins from a high point, less gas will be injected to maintain the storage peak at roughly the same level.

    That correlation does exist, but the first chart in that article does not show the correlation well, because the total storage capacity has expanded over the years, therefore the target storage peak is not a fixed number, but one that gradually goes up over the years. Once this effect is taken into account, the linear correlation looks perfect.

    See the revised chart below:

    (click to enlarge)

    I am publishing the second part of the sequel article, Rebalancing of the US Coal and Natural Gas Industry. Please check back and read it on Monday or Tuesday. It explains the correlation in details. Enjoy!

    Another question to ask: Is natural gas usage really displaying coal in electricity production? Let's look at the actual data from EIA, for the past 12 years, for an answer. The data table is below:

    (click to enlarge)

    From row 2 of the table, it is evident that coal generation is essentially flat and only dent slightly in the most recent three years, due to the financial crisis.

    Natural gas usage did go up significantly, but it did not display coal, it just brings up the total electricity generated. More over, usage of natural gas goes up in proportion to the NG capacity going up. The NG turbines' usage rate, defined as percentage of hours of running, remains some where around 28% and does not go up. Neither is usage rate of coal units going down much.

    This debunks the notion of Paul Santos that utilities are trying to run NG units more often and coal units less often in an effort to switch more coal usage to natural gas. That did NOT happen.

    What happened is over the years more NG units are installed expanding the ability to burn more natural gas. However that is a long term slow process, and expanded natural gas usage does not displace coal. The existing coal units are still used, not sit idled.

    Disclosure: I am long JRCC, PCX, ACI, ANR, BTU.

    Themes: commodity, coal, natural gas, energy Stocks: Q, PCXCQ, ACI, ANR, BTU, UNG, USO, WLT, EOG, XOM, BP
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Comments (28)
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  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    There might be a reason for the close correlation - the peaks are near the Demonstrated Peak Working Gas Capacity as per EIA. It might happen that the tops of the injection cycles are already being constrained by capacity - this year would just make it be constrained for longer.
    15 Apr 2012, 11:22 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Paulo:

     

    I explained it very clearly already. The natural gas industry will look at where they start the injection season, and adjust production accordingly, consciously or un-consciously. The goal is to reach a reasonable peak storage level, not too high, but adequate enough.

     

    Basically if the storage starts low, they try to produce and inject more. If the storage starts high they cut production back.

     

    No one is stupid. The industry knows they need to cut and they do cut. There is a lagging effect so you do not see it immediately, unliek in coal the cut is immediately seen. But there is plenty of time for the cut to eventually show up in storage. As history demonstrated and as shown by the chart, they always pretty consistently bring peak storage to well within 100 BCF of the ideal target level. The sole exception for 2000 where the deviation was -470 BCF on teh down side, was due to they were working on the facility so the storage injection had to be lower than usual.
    16 Apr 2012, 12:04 AM Reply Like
  • anu-sha
    , contributor
    Comments (6) | Send Message
     
    Mark,

     

    I read your point about power generation being comprised of a base component, which is mostly coal based, and a variable component that is mostly NG based. The NG based power generation can only be turned on during peak load hours because NG based turbines can not run constantly unlike coal based turbines. Based on this point and your other points, I agreed with your analysis that power generation companies can not increase the NG based power generation too much, unless new turbines are ordered.

     

    So, I wanted to check the EIA data, that you have quoted in your arguments. Below is the link that I would suggest that you should take a look at - http://bit.ly/HW2Rlw

     

    This report shows the total power generation in thousand MW, broken down by each type of fuel source (coal, NG, Nuclear, hydro and others) for the year 1998 to 2012 Jan. For year 2010 and 2011, this break down is given on a monthly basis. If we check the data for 2010, I notice that the maximum NG based monthly power generation is 121,151 for AUG 2010 and minimum is 63,431 for MAR 2010. Same data for 2011 is - 120,377 for JUL 2011 and 65,852 for FEB 2011. Based on this data, we can say that NG power generation can reach up to roughly 120,000 per month, if the power generation companies really wanted it to.

     

    For 2010, the average monthly NG based power generation was 82,308.08. For 2011, the average monthly NG based power generation was roughly 84716. If the power companies wanted to, they could increase the NG based power generation from about 84k monthly to about 120k, if I do not apply any consideration for maintenance down time and margin of safety. From 84k to 120k, is about an increase of 40%. If we take 10% out of it for maintenance down time and safety factor, which in itself may not be correct, but I will consider it for argumentation purpose, power generation companies can still increase NG based power generation by about 30%. An example of this observation is - 2012 JAN data - NG based generation was 91,213 and 2011 JAN was 74,458. So, we can see that power generation companies are in fact increasing their NG based generation. The same is true for 2011 NOV, DEC, but not to that extent. If you check the coal based generation in this report, we will notice that it has indeed gone down.

     

    Based on this observation, I would say that there is still some room for power generation companies to switch more of their generation to NG. Due to this, if they indeed can and do this, they may reduce their coal usage further.

     

    As you mentioned, coal producers are and will respond to this change by reducing the coal output, which should help them stabilize the coal prices soon. Agreed on this point.

     

    Based on above points, I would say that we may not be at the bottom for coal prices just now. We will have to watch the power generation data for FEB, march and coming months to keep track of this.

     

    Thanks for your great analysis, Mark.
    Paula, thanks for your thoughts too.
    16 Apr 2012, 06:01 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    Mark, you'd need to do find where in the injection cycle have the injections been smaller. If they were smaller at the end of the cycle, that supports the theory that they were constrained by the lack of storage. As I said, the top of the cycles being near the Demonstrated Peak Working Gas Capacity might not be a coincidence.
    16 Apr 2012, 07:25 AM Reply Like
  • anu-sha
    , contributor
    Comments (6) | Send Message
     
    Mark,

     

    I read your point about power generation being comprised of a base component, which is mostly coal based, and a variable component that is mostly NG based. The NG based power generation can only be turned on during peak load hours because NG based turbines can not run constantly unlike coal based turbines. Based on this point and your other points, i agreed with your analysis that power generation companies can not increase the NG based power generation too much, unless new turbines are ordered.

     

    So, i wanted to check the EIA data, that you have quoted in your arguments. Below is the link that i would suggest that you should take a look at - http://bit.ly/HW2Rlw

     

    This report shows the total power generation in thousand MW, broken down by each type of fuel source (coal, NG, Nuclear, hydro and others) for the year 1998 to 2012 jan. For year 2010 and 2011, this break down is given on a monthly basis. If we check the data for 2010, i notice that the maximum NG based monthly power generation is 121,151 for AUG 2010 and minimum is 63,431 for MAR 2010. Same data for 2011 is - 120,377 for JUL 2011 and 65,852 for FEB 2011. Based on this data, we can say that NG power generation can reach upto roughly 120,000 per month, if the power generation companies really wanted it to.

     

    For 2010, the average monthly NG based power generation was 82,308.08. For 2011, the average monthly NG based power generation was roughly 84716. If the power companies wanted to, they could increase the NG based power generation from about 84k monthly to about 120k, if i do not apply any consideration for maintenance down time and margin of safety. From 84k to 120k, is about an increase of 40%. If we take 10% out of it for maintenance down time and safety factor, which in itself may not be correct, but i will consider it for argumentation purpose, power generation companies can still increase NG based power generation by about 30%. An example of this observation is - 2012 JAN data - NG based generation was 91,213 and 2011 JAN was 74,458. So, we can see that power generation companies are infact increasing their NG based generation. The same is true for 2011 NOV, DEC, but not to that extent. If you check the coal based generation in this report, we will notice that it has indeed gone down.

     

    Based on this observation, i would say that there is still some room for power generation companies to switch more of their generation to NG. Due to this, if they indeed can and do this, they may reduce their coal usage further.

     

    As you mentioned, coal producers are and will respond to this change by reducing the coal output, which should help them stabilize the coal prices soon. agreed on this point.

     

    based on above points, i would say that we may not be at the bottom for coal prices just now. we will have to watch the power generation data for FEB, march and coming months to keep track of this.

     

    thanks for your great analysis, Mark.
    Paula, thanks for your thoughts too.
    16 Apr 2012, 05:18 AM Reply Like
  • anu-sha
    , contributor
    Comments (6) | Send Message
     
    Mark,

     

    I read your point about power generation being comprised of a base component, which is mostly coal based, and a variable component that is mostly NG based. The NG based power generation can only be turned on during peak load hours because NG based turbines can not run constantly unlike coal based turbines. Based on this point and your other points, I agreed with your analysis that power generation companies can not increase the NG based power generation too much, unless new turbines are ordered.

     

    So, I wanted to check the EIA data, that you have quoted in your arguments. Below is the link that I would suggest that you should take a look at - http://bit.ly/HW2Rlw

     

    This report shows the total power generation in thousand MW, broken down by each type of fuel source (coal, NG, Nuclear, hydro and others) for the year 1998 to 2012 Jan. For year 2010 and 2011, this break down is given on a monthly basis. If we check the data for 2010, I notice that the maximum NG based monthly power generation is 121,151 for AUG 2010 and minimum is 63,431 for MAR 2010. Same data for 2011 is - 120,377 for JUL 2011 and 65,852 for FEB 2011. Based on this data, we can say that NG power generation can reach up to roughly 120,000 per month, if the power generation companies really wanted it to.

     

    For 2010, the average monthly NG based power generation was 82,308.08. For 2011, the average monthly NG based power generation was roughly 84716. If the power companies wanted to, they could increase the NG based power generation from about 84k monthly to about 120k, if I do not apply any consideration for maintenance down time and margin of safety. From 84k to 120k, is about an increase of 40%. If we take 10% out of it for maintenance down time and safety factor, which in itself may not be correct, but I will consider it for argumentation purpose, power generation companies can still increase NG based power generation by about 30%. An example of this observation is - 2012 JAN data - NG based generation was 91,213 and 2011 JAN was 74,458. So, we can see that power generation companies are in fact increasing their NG based generation. The same is true for 2011 NOV, DEC, but not to that extent. If you check the coal based generation in this report, we will notice that it has indeed gone down.

     

    Based on this observation, I would say that there is still some room for power generation companies to switch more of their generation to NG. Due to this, if they indeed can and do this, they may reduce their coal usage further.

     

    As you mentioned, coal producers are and will respond to this change by reducing the coal output, which should help them stabilize the coal prices soon. Agreed on this point.

     

    Based on above points, I would say that we may not be at the bottom for coal prices just now. We will have to watch the power generation data for FEB, march and coming months to keep track of this.

     

    Thanks for your great analysis, Mark.
    Paula, thanks for your thoughts too.
    16 Apr 2012, 06:01 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    There are documents from teh EIA showing that with lower NG prices the NG generation could take the spot of coal generators in baseload, so that thing about assuming that coal will do the baseload is not supported by what the EIA believes in.
    16 Apr 2012, 07:24 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » That's only a theoretical possibility. Utilities could leave just enough NG turbines on or off, and keep the remaining ones running all teh time.

     

    That is NOT occuring, data shows utilitys are using NG turbines 28% of the time, that means they are running NG turbines only as peak hour supplemental generator and rather let they sit idle when not needed, than to use them as base supply and keep running 24 hours a day. The reality is there is no strong enough price incentive for utility to run NG turbines as baseline supply units.
    16 Apr 2012, 10:01 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    Well, EIA thinks it is occurring.

     

    There are many reasons why the substitution can't be total, so this is something that needs to be modeled at a low level, and indeed would be enough trouble to write a phd on. Even the EIA paper says there are many restrictions it is not considering.

     

    But still, it is happening, and will get worse. The economic incentive is strong once anyone is running NG at $2.00, it's cheaper per BTU than CAPP coal and that's before the higher efficiencies come into play.
    16 Apr 2012, 10:04 AM Reply Like
  • Titan06
    , contributor
    Comments (303) | Send Message
     
    no utility is getting gas deliverd for $2.00 per mmbtu.......checked my utility bill yesterday im paying ~$6 per mmbtu. utilitys probably around 4$ per mmbtu
    16 Apr 2012, 10:33 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Titan06:

     

    You are absolutely right on prices. Here are what EIA's data says about NG prices. No end user actually paid spot price:

     

    http://bit.ly/IckJpX

     

    In January 2012, the producers get paid $2.89 at well head. The utilities paid $3.81 to generate electricity. Home users paid $9.55. The average Henry Hub spot in the same month was $2.60. Obviously no one pays that prices. Even produers were paid higher at well heads. I do not know who is the wall street sucker buying gas from producers for $2.89 and then sell it at spot for $2.60.

     

    At the REAL NG price utilities paid at $3.81, there is ZERO price incentive to switch from coal to gas. The switch only begin to give economic incentive only when utilities are paying $3 or even $2.50. But even then, the incentive maybe too small to be worth the effort to switch.

     

    At dirt cheap electricity spot price of 1.5 cents per KWH, no one buys spot NG to generate spot electricity. It's below cost.
    16 Apr 2012, 12:08 PM Reply Like
  • Titan06
    , contributor
    Comments (303) | Send Message
     
    Mark,

     

    Nice chart it matches up to the historical USA temperature data which can been seen here.

     

    http://1.usa.gov/JpX4kk

     

    2006,1995, 1999 & 2002 were abnormally warm winters thus low net injection as shown in your chart.

     

    2003 and 2001 were cold

     

    i beleive you are correct and we will see a very small injection this year and producers scale back on gas production, which is evident by the gas rig count falling approximatly 7-15 rigs a week
    16 Apr 2012, 10:20 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    Keep in mind that it's hard for him not to be correct if storage stops at Demonstrated Peak Working Gas Capacity. The thing is, how do you get there? Do you get there by seeing lower injections all the way up the curve, or just at the end when you can't inject because there's no storage left?
    16 Apr 2012, 10:34 AM Reply Like
  • Titan06
    , contributor
    Comments (303) | Send Message
     
    its a good point, and ill point out that producers are allready adjusting and cutting production. they dont want injection to fill it will hurt them alot so they will slow it down as much as they can. It dosent make sense to keep dumping gas at full tilt and then one day say wooops! were full.

     

    gas rig count is falling and this will have a major impact on injection volumes just watch
    16 Apr 2012, 10:50 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    I've said as much, though I think there's enough inertia that the impact will only truly be felt in 2013.

     

    Also the coal substitution increases NG usage.

     

    But still, we went though winter, NG wasn't much impacted and now inventories are turning up earlier than usual, it all points towards reaching the top of storage earlier.
    16 Apr 2012, 10:55 AM Reply Like
  • Titan06
    , contributor
    Comments (303) | Send Message
     
    NG inventories saw a net positive injection 2 weeks earlier than normal and we had the 4th warmest march in last 100 years.. so i understand why it got a injection early. time will tell we got all summer to see how this plays out
    16 Apr 2012, 11:16 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Paulo:

     

    Gas is compressible. There is never a definite storage max which when you reached you can not squeeze a bit more. Gas expands and shrinks under different temperature. When the cavern is at 0C versus 20C temperature, the save cavern volume at the same pressure can store 7.32% more gas. At a storage capacity of 8760 BCF, 7.32% easily mean an extra 641 BCF more gas can be stored for the caverns rated for 8760 BCF, just because the temperature helps.

     

    Once again the storage capacity number is just a guidance and a guestimate number. It was NEVER serious challenged and there was NEVER a time the storage even approach close to the rated capacity. There was always at leat a 700 BCF to 900 BCF spare room left before the limit is hit, even at peak storages. Even if the limit is hit chances are we can comfortably store much more than the rated number and there is not a problem. As long as the machine can compress the gas it can be pumped into the caverns.

     

    Not like liquid or solid that once you fill up, you can't put another drop in.
    16 Apr 2012, 12:19 PM Reply Like
  • Elliot McNaught
    , contributor
    Comment (1) | Send Message
     
    It's a race between the companies to fill the storage. If you get your gas to storage before the other guy, you win. So you want to put as much into storage as possible, early on. Once you've put loads in there, it doesn't matter so much if you rush to top it out, and you probably pay more for storage, so there is less incentive. You've squirreled away enough. You can cut the production now that is unprofitable and un-hedged. You want to race to get your fuel in storage, if it is hedged. Other companies produce nat gas as a byproduct of getting other liquids, and they undoubtedly will want to squirrel away some more gas too. Even though the rig count drops, production could remain strong for a while.
    24 Apr 2012, 02:25 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Paulo:

     

    The chat contains 18 years of US natural gas history, and NOT a single year see peak storage deviated on the upper side for more than 100 BCF. The factual data speaks louder than your rhetoric.

     

    The chart predicts the storage peak by October, 2012 will reach some where around 3800 BCF (working gas), plus or minus no more than 100 BCF. The rated storage capacity is 4400 BCF working gas. We reach 3900 BCF, tops, maybe a bit below 4000, but will never go beyond 4000.

     

    Due to the high correlation shown, this prediction is very credible. More so that the super low natural gas spot price has already generated the psychological effect to force NG producers to move their butts to cut production. Past history shows there is always plenty of time to cut production before peak in November.
    16 Apr 2012, 12:31 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    I am not speaking about the design limit, I'm speaking about the Demonstrated Peak Working Gas Capacity, which is lower.

     

    The high correlation from a ball hitting the ceiling or falling very short of it would also be high. And the reason would be similar.

     

    You'd be concluding that:
    * The initial force applied was not very important in the height the ball hit;
    * The ball was smart and knew beforehand to decelerate by its own.

     

    Again, to disprove this you need to show that the injectios slow down MUCH earlier than hitting the possible ceiling. Why don't you run a correlation using the injections just to some arbitrary point well before the regular top?

     

    Also, bear in mind that although we're talking about ONE ceiling, in fact there are many ceilings, one per each storage facility, so that as you get near the top you see a deceleration in injections, overall, as less and less facilities accept gas.
    16 Apr 2012, 12:59 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Paulo:

     

    I do not need to waste my time to do elaborated data simulation to debunk you, because obviously you have no ability to interpret data.

     

    The EIA storage graph is good enough:

     

    http://bit.ly/Hxhqtm

     

    The curve, at each bottom point, responds nicely and immediately knows where it should go in the fall. It's not like it keeps going up and then in the last moment it find itself needing to bend down to meet the peaks. No, the curve runs seamlessly.

     

    The NG industry is not dump. When they know they need to cut production, they always cut production. Why it is so hard for you to understand the basic concept that most people are way smarter than you in how to run their business?
    17 Apr 2012, 07:00 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    Such a long term chart can easily visually trick you. I just ran a look through the actual production numbers, corrected by the number of days in a month, and there are several Septembers that show strangely reduced production.
    17 Apr 2012, 07:11 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » I updated the instablog to add a data table.

     

    The new data tables shows that natural usage in power generation is increasing slowly, commensurate with the installed NG capacity growth, but not faster than that. More over it does NOT display coal usage, it simply brings the total electricity generated up. The coal generated electricity essentially remain flat.

     

    Thee growth of the NG usage, proportional to NG installed capacity growth, is a long time slow process, averaging about 6% growth a year. This is NOT a threat to coal demand.
    17 Apr 2012, 06:30 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    Mark, the switching started around November 2011, naturally you won't find it in yearly numbers. It's a near real time phenomenon, depends on the relative prices.
    17 Apr 2012, 06:43 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Once again you turn a blind eye to existing data. The monthly data up till January, 2012 shows NG turbines were used only 28% of the time, in line with historical norm. There is no switch. and the price says there is no price incentive to switch.
    17 Apr 2012, 06:55 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    The January data shows coal being used around 25% less, natural gas being used 22% more. That's what it shows, not all of coal's drop is substitution, but natural gas should have DROPPED if there was no substitution (given the weather). That drop (which didn't happen) + what it went up = substitution. The drop is hard to quantify (could only be done through a thorough analysis of what happened in each market day by day.

     

    (regarding the price, remember the efficiencies, well before it's 1:1 there is already substitution. Right now it's at its worst - natgas is cheaper per BTU, even before the efficiencies)
    17 Apr 2012, 06:58 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Paulo:

     

    Since this January and the last one are VERY DIFFERENT, actually a 100 year different, since January, 2011 was a particularly cold month and January, 2012 was once in a hundred year warm January. The two simply do not compare.

     

    Compare January, 2012 to Dec., 2011 makes better sense due to proximity of the two months:

     

    http://bit.ly/xuv4bq

     

    Based on the data, month by month, coal dropped by 2.74% and NG increased by 5.3%. That's hardly any convincing change consider that NG spot price dropped from $3.50 to $2.50, almost 30% drop. Such a huge price drop moved NG usage up only 5%? More likely it was purely a weatehr and seasonality thing.
    20 Apr 2012, 05:51 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20651) | Send Message
     
    November and December already had substitution - and obviously weather was also a factor. But again, you can't look just at what NG went up, because with the weather, NG should have gone down as well.
    20 Apr 2012, 02:59 PM Reply Like
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