Summary — Storage and Imbalances

Overview: Two Types of Inventory on the Pipeline

Natural gas operations routinely result in gas being held either intentionally or unintentionally within the pipeline system. This module distinguishes between two fundamentally different types of pipeline inventory:

• Storage — a planned, contractual activity where a market participant deliberately injects gas into an underground (or above-ground) facility for later withdrawal
• Imbalances — unplanned, operationally-driven variances that arise when the volume of gas received into a pipeline system does not match the volume delivered out of it

The critical distinction is intent: storage is deliberate and managed; imbalances are accidental and must be resolved after the fact. Both, however, represent inventory with measurable financial value and must be tracked in any ETRM system.

Storage: The Intentional Inventory

What Storage Is and Why It Exists

Storage functions like a household pantry or refrigerator: you buy groceries (gas) in bulk when convenient or cheap, store them, and draw on them as daily needs dictate. Similarly, natural gas companies inject gas into storage during periods of low demand or low price, then withdraw it during peak demand or when prices justify it.

There are four primary reasons companies store gas:

• Operational stability — Pipelines maintain a minimum pressure level called line pack (the gas permanently residing in the pipe to keep it pressurized and operational). When line pack fluctuates outside safe bounds, storage provides a fast-response buffer. Pipelines themselves contract with storage facilities and producers to be able to inject or withdraw quickly to maintain system integrity.
• Seasonal demand management — Winter heating demand in northern and Midwestern states frequently exceeds what transmission pipelines can physically deliver on any given day. Underground storage facilities located close to consumption centers (predominantly depleted reservoirs in the Midwest and Northeast) supplement pipeline flows during peak winter periods.
• Peak demand shaving — Within a single day, demand peaks (e.g., midday commercial/industrial loads) can exceed what is flowing in the pipe. Storage allows operators to shave those intra-day peaks.
• Arbitrage — Marketing companies buy gas when prices are low (e.g., summer, $1.90/MMBtu), inject it into storage, pay ongoing storage costs (~$0.10/MMBtu/month), and sell it in high-price winter periods (e.g., $4.00/MMBtu). The strategy is profitable only if the sales price exceeds total all-in cost (purchase + transport + injection fees + fuel + storage fees + withdrawal fees + fuel out).

The U.S. Storage Infrastructure

• Approximately 123 storage operators control roughly 400 underground storage facilities in the United States
• Total storage capacity: ~4,059 Bcf
• Average daily deliverability: ~85 Bcf/day
• The EIA (Energy Information Administration) publishes a weekly storage survey tracking net injections and withdrawals — a widely watched market indicator

Storage is geographically concentrated in the Midwest, Northeast, and mid-Atlantic regions because those areas historically produced their own gas (depleting natural reservoirs), then repurposed those depleted formations for storage close to high-demand markets.

Types of Physical Storage Facilities

Players in the Storage Market

• Facility operators — Companies that own and operate the physical storage infrastructure
• Pipelines — Transport gas to and from storage; some own storage outright for operational stability
• Local Distribution Companies (LDCs) — The largest users of storage capacity because they have direct service obligations to end-use customers (residential, commercial) and face serious liability if supply is interrupted, especially during cold weather. They hold large storage reserves to ensure they can always serve customers even if upstream supply is disrupted.
• Marketing companies — Use storage to manage daily gas flows and to pursue arbitrage opportunities
• End users — Small cities, co-ops, and large industrial consumers occasionally hold storage capacity directly

Storage Contract Terms and Physical Mechanics

When a company signs a storage contract, key parameters include:

• Total capacity (analogous to the size of a U-Haul storage unit) — the maximum MMBtu the subscriber can hold in place at any time
• Maximum Daily Injection Rate (MDIR) — the maximum MMBtu that can be injected in a single day
• Maximum Daily Withdrawal Rate (MDWR) — the maximum MMBtu that can be withdrawn in a single day
• Gas In-Place (Balance in Storage) — the running inventory balance at any point in time

Gas physically moves vertically when injected (compressed downward into the reservoir) and must be pumped back up on withdrawal. Both directions require compressor energy — hence fuel is retained in both directions.

Storage Pricing Structure

Storage facilities charge for three distinct services:

1. Demand charge — A fixed monthly fee paid simply for having reserved capacity (the "right to capacity"), regardless of whether the subscriber uses it. Analogous to a monthly rent on a storage unit.
2. Injection fees and fuel — Charges applied when gas is physically injected. The facility retains a small percentage of the gas as injection fuel to power compressors.
3. Withdrawal fees and fuel — Charges applied when gas is physically withdrawn. Similarly, withdrawal fuel is retained.
4. In-place fees — Some facilities charge a per-MMBtu/day fee on the balance sitting in storage. Historically billed at month-end (which allowed arbitrage by injecting and withdrawing within the month to avoid the fee); most facilities now calculate in-place charges daily to close this loophole.

The Full Storage Transaction Cycle: Following Gas from Purchase to Sale

The Excel storage model in the module traces gas through seven distinct steps, each adding cost and changing the landed value. A worked example with representative numbers:

Step 1 — Purchase for Storage

• Buy 65,000 MMBtu at $3.00/MMBtu = $195,000 payable

Step 2 — Transport to Storage (above-ground leg)

• Transport rate: $0.15/MMBtu applied to receipt volumes
• Fuel retained by pipeline: ~10 MMBtu (a small percentage of volumes)
• Transport payable: ~$9,750
• Net volumes arriving at storage inlet: 64,990 MMBtu

Step 3 — Storage Injection

• Landed above-ground (AG) price: $3.1505/MMBtu (purchase cost + transport cost spread across surviving volumes after fuel loss)
• Injection fee: $0.20/MMBtu → ~$12,998
• Injection fuel retained: 650 MMBtu (approximately 1% of volumes)
• Net injected (below ground): 64,340 MMBtu
• Net injection rate (all-in cost): $3.384/MMBtu
• Total asset value injected: ~$217,748

Why does the rate jump above the simple sum of purchase + transport? Because fuel volumes are lost but their cost (at $3.00/MMBtu) must be absorbed by the surviving volumes. Fewer units carry the same total dollar investment, so the per-unit cost rises.

Step 4 — Gas In-Place (Storage Balance)

The model maintains a layered inventory showing each month's injection separately:

The WACOG (Weighted Average Cost of Gas) is computed by dividing total asset value by total MMBtu: $710,961 ÷ 218,510 = $3.2537/MMBtu. This becomes the withdrawal price when using the WACOG method.

Step 5 — Storage Withdrawal

• Withdraw 150,000 MMBtu using one of the valuation methods (FIFO, LIFO, or WACOG)
• Withdrawal fee: $0.1755/MMBtu → ~$26,325
• Withdrawal fuel: retained at ~1.85% of gross withdrawal
• Net volumes exiting storage to above-ground: ~147,225 MMBtu at $3.6035/MMBtu

Step 6 — Transport from Storage (to market)

• Transport rate: $0.3545/MMBtu commodity cost
• Fuel retained: $0.0425/MMBtu equivalent
• Net volumes delivered to market: ~140,968 MMBtu at ~$4.1336/MMBtu
• Total all-in cost (asset value delivered): ~$582,711

Step 7 — Sale / Landed Delivered Price

• If the company sells at a $0.20/MMBtu margin above all-in cost: sale price = ~$4.3336/MMBtu
• Estimated margin: ~$28,188

This end-to-end model makes clear why tracking both volume and value at every step is essential.

Inventory Valuation Methods for Storage and Imbalances

Because gas from different injection periods may have different costs, companies must choose how to value gas when it is withdrawn. This choice has tax and financial reporting implications — once selected, it must be maintained or changed only with IRS approval.

FIFO (First In, First Out)

• The oldest gas (earliest injection) is valued and withdrawn first
• Analogy: a grocery store stocker pushes older bread to the front and puts fresh bread in the back so the older product sells first (perishable goods logic)
• In the model: FIFO draws first from July, then August, then September until 150,000 MMBtu is satisfied
• Average withdrawal price in the model: ~$3.19/MMBtu (reflects the lower-cost summer injections)

LIFO (Last In, First Out)

• The most recently injected gas is withdrawn first
• Analogy: 55-gallon drums stacked in a warehouse — it is physically easiest to take from the front (most recent) stack; the product doesn't spoil so there is no urgency to move older inventory
• In the model: LIFO draws first from October, then September, then part of August
• Reflects the higher-cost recent injections

WACOG (Weighted Average Cost of Gas)

• All injected gas is treated as co-mingled; withdrawals are valued at the blended average rate across all layers
• Most widely used method today; simpler to administer
• In the model: all 218,510 MMBtu at $3.2537/MMBtu average
• Withdrawing 150,000 MMBtu at WACOG: asset value = 150,000 × $3.2537 = ~$488,055

Index Pricing" data-glossary-def="A pricing methodology in which the transaction price is tied to a published market index (such as Henry Hub NYMEX, Inside FERC, or Gas Daily) rather than a fixed negotiated price. Most physical gas transactions in North America use index pricing with adders." class="glossary-term">Index Pricing

• Instead of tracking actual cost, some companies use a published market index (e.g., Platts, NGPL index for that location) as the proxy value for injected gas
• Simpler but less precise; regulators (especially for utility companies subject to jurisdictional audit) may require the more rigorous landed price method

FOFI (First Out, First In) — Parking Loans

• A special method for parking loan arrangements where a company withdraws gas it does not yet own (borrowing from the storage facility's inventory), then later injects replacement gas
• Analogous to overdrafting a bank account: the first new deposit goes to cover the negative balance before adding to available balance
• Allowed under certain storage contracts for a fee

The Matching Principle: Why Storage Valuation Matters for Accounting

A critical accounting concept introduced in this module is the matching principle: you can only recognize as an expense the cost of goods that have actually been sold in the current period. Gas that is injected into storage has not yet been sold — it must be deferred as inventory on the balance sheet.

Example:

• Buy 10 units at $3 each = $30 total investment
• Sell only 2 units at $10 each = $20 revenue
• Under matching principle: cost of goods sold = 2 × $3 = $6 (not $30)
• Gross profit = $20 − $6 = $14
• The remaining 8 units ($24) sit as inventory (deferred expense) until sold

Without the matching principle, a company would show a massive loss on the day it buys and stores gas, then a massive artificial gain on the day it sells — making financial statements unintelligible and volatile. Storage creates deferred expenses that flow through the income statement only when the gas is physically withdrawn and sold.

Implication for ETRM systems: The system must track both the quantity (MMBtu) and the value ($/MMBtu × MMBtu = $) of gas in storage at all times to properly calculate deferrals and cost of goods sold. Failing to value imbalances the same way is an error — a $10,000 imbalance inventory has the same financial statement impact as $10,000 of storage inventory.

Imbalances: The Unintentional Inventory

Definition and Cause

An imbalance occurs when the volume of gas received into a pipeline on behalf of a shipper does not equal the volume delivered out. Because gas flows continuously and is controlled by physical valves, exact matching is operationally difficult:

• A long imbalance (supply > demand) results when a shipper puts more gas into the pipeline than their customers take out — gas "rattles around" in the system
• A short imbalance (demand > supply) results when customers take more gas than the shipper delivered — the pipeline's line pack makes up the difference temporarily

Example of a long imbalance:

• Shipper schedules: 1,000 MMBtu receipt, 1,000 MMBtu delivery
• Vendor delivers: 1,000 MMBtu ✓
• Customer takes: 900 MMBtu ✗
• Result: 100 MMBtu long imbalance sitting on the pipeline

Example of a short imbalance:

• Shipper schedules: 10,000 MMBtu receipt, 15,500 MMBtu delivery
• Vendor delivers: 8,700 MMBtu (underperforms)
• Customers take: 15,500 MMBtu as scheduled
• Result: 6,800 MMBtu short imbalance — pipeline's line pack was drawn down

Line Pack: The Pipeline's Own Inventory

Line pack is the gas permanently residing inside a pipeline system, purchased by the pipeline company as part of the infrastructure investment, that keeps the system pressurized and operational. Line pack can absorb modest fluctuations (typically within ~10% above or below target), but large or sustained variances:

• Threaten pipeline integrity if pressure drops too low
• Create operational hazards if pressure rises too high

Line pack is effectively the pipeline's buffer against shippers' imbalances. When shippers run long, line pack rises; when shippers run short, line pack falls. The pipeline recovers through cash-out or physical payback mechanisms.

Imbalance Resolution Methods

1. Physical Payback

• The shipper is allowed to "make up" the gas over subsequent days
• Long imbalance: shipper reduces purchases while maintaining deliveries, letting the pipeline return the extra gas
• Short imbalance: shipper increases purchases while maintaining deliveries, replacing the gas taken from line pack
• Requires a pipeline tariff that permits physical payback (not all do)

2. Cash-Out

• The pipeline buys the shipper's excess gas (long position) at a price below market — discouraging intentional over-scheduling
• The pipeline sells gas to cover the shipper's deficit (short position) at a price above market — discouraging intentional under-scheduling
• Example: if market price = $3.00/MMBtu, the pipeline might buy long gas at $2.75 and sell short gas at $3.25
• Tolerances exist in most tariffs — small imbalances (e.g., within 2–5% of scheduled volumes) are not subject to cash-out penalties

Scheduling to Balance: The Scheduler's Role

The scheduler is responsible for ensuring that for every unit of gas entering the pipeline system, a corresponding unit is accounted for on the delivery side. Like a bank teller who cannot leave until the till balances, a scheduler cannot close a day without resolving all variances.

Balancing workflow (as demonstrated in the module's lab exercise):

1. Enter all supply (buy) transactions and all demand (sell + storage injection) transactions
2. Link receipt and delivery transactions through the scheduling system
3. Observe the net position:
   • Long (receipts > deliveries): create an imbalance short delivery transaction for the excess volume and link it to the supply side
   • Short (deliveries > receipts): create an imbalance long receipt transaction for the deficit volume and link it to the demand side
4. Schedule all transactions with appropriate transport (or "none" for imbalances on the same pipe segment)
5. Confirm zero variance

Scheduling equation:

Receipts (supply) = Deliveries (demand) + Storage Injections − Storage Withdrawals ± Imbalance Adjustments

A perfectly balanced schedule shows zero variance between total receipts and total deliveries.

Storage vs. Imbalances: Side-by-Side Comparison

Transport, Processing, and Storage: The Full Logistics Chain

The module places storage within the broader logistics chain: Supply → Transport → Processing → Storage → Demand.

Key cost characteristics at each stage:

Only processing plants generate a revenue flow — the liquids extracted (ethane, propane, butane, natural gasoline) are sold by the plant, with revenues passed back to the gas owner. This is a key exam distinction.

Field rate vs. market rate for transport:

• Field rate — the per-MMBtu charge for moving gas over long-distance transmission (proportional to distance)
• Market rate — an additional per-MMBtu charge for delivering into a specific market area (the same regardless of where the gas originated)
• Total transport rate = field rate + market rate; regulated by FERC (interstate) or state commissions (intrastate); must be approved before changes take effect

LNG as a Peak-Shaving Tool

LNG (Liquefied Natural Gas) stored in above-ground tanks serves a specialized storage function. Because LNG is compressed and liquefied methane with a very high BTU content per unit volume, it can be vaporized and injected into flowing gas streams as a BTU booster — increasing the heating value (MMBtu/Mcf) of the gas without increasing the physical volume flowing through the pipe. This is particularly useful during peak demand periods when transmission capacity is constrained.